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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
–––––––––––––––––––––––––––––––––––––––––––––––––––– 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number: 000-51402
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter) 
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
04-6002575
(I.R.S. employer identification number)
 
 
 
 
 
 
 
800 Boylston Street
Boston, MA
(Address of principal executive offices)
 
02199
(Zip code)
 
 (617) 292-9600
(Registrant's telephone number, including area code)
 
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. x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an 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.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
(Do not check if a smaller reporting company)
 
Smaller reporting company o
Emerging growth company o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
 
 
Shares outstanding as of
July 31, 2017
Class A Stock, par value
$100
 
zero
Class B Stock, par value
$100
 
23,286,595




Federal Home Loan Bank of Boston
Form 10-Q
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2
Table of Contents


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
(unaudited)

 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and due from banks
$
176,852

 
$
520,031

Interest-bearing deposits
279,046

 
278

Securities purchased under agreements to resell
4,349,000

 
5,999,000

Federal funds sold
4,460,000

 
2,700,000

Investment securities:
 
 
 

Trading securities
514,313

 
612,622

Available-for-sale securities - includes $1,917 and $7,968 pledged as collateral at June 30, 2017, and December 31, 2016, respectively that may be repledged
6,641,796

 
6,588,664

Held-to-maturity securities - includes $9,945 and $23,618 pledged as collateral at June 30, 2017, and December 31, 2016, respectively that may be repledged (a)
1,898,097

 
2,130,767

Total investment securities
9,054,206

 
9,332,053

Advances
38,427,616

 
39,099,339

Mortgage loans held for portfolio, net of allowance for credit losses of $500 and $650 at June 30, 2017, and December 31, 2016, respectively
3,804,581

 
3,693,894

Accrued interest receivable
85,997

 
84,653

Premises, software, and equipment, net
5,940

 
5,211

Derivative assets, net
56,623

 
61,598

Other assets
54,386

 
49,529

Total Assets
$
60,754,247

 
$
61,545,586

LIABILITIES
 

 
 

Deposits
 
 
 
Interest-bearing
$
441,310

 
$
444,897

Non-interest-bearing
27,863

 
37,266

Total deposits
469,173

 
482,163

Consolidated obligations (COs):
 
 
 

Bonds
28,518,424

 
27,171,434

Discount notes
27,865,529

 
30,053,964

Total consolidated obligations
56,383,953

 
57,225,398

Mandatorily redeemable capital stock
37,380

 
32,687

Accrued interest payable
84,093

 
80,822

Affordable Housing Program (AHP) payable
78,344

 
81,627

Derivative liabilities, net
329,229

 
357,876

Other liabilities
38,564

 
40,235

Total liabilities
57,420,736

 
58,300,808

Commitments and contingencies (Note 18)


 


CAPITAL
 

 
 

Capital stock – Class B – putable ($100 par value), 24,086 shares and 24,113 shares issued and outstanding at June 30, 2017, and December 31, 2016, respectively
2,408,647

 
2,411,306

Retained earnings:
 
 
 
Unrestricted
1,000,694

 
987,711

Restricted
244,631

 
229,275

Total retained earnings
1,245,325

 
1,216,986

Accumulated other comprehensive loss
(320,461
)
 
(383,514
)
Total capital
3,333,511

 
3,244,778

Total Liabilities and Capital
$
60,754,247

 
$
61,545,586

_______________________________________
(a)   Fair values of held-to-maturity securities were $2,160,053 and $2,372,290 at June 30, 2017, and December 31, 2016, respectively.

The accompanying notes are an integral part of these financial statements.


3
Table of Contents


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
127,736

 
$
81,011

 
$
234,319

 
$
159,230

Prepayment fees on advances, net
130

 
863

 
294

 
2,932

Securities purchased under agreements to resell
6,330

 
2,713

 
10,748

 
5,906

Federal funds sold
12,708

 
5,176

 
22,992

 
10,792

Investment securities:
 
 
 
 
 
 
 
Trading securities
2,757

 
2,205

 
5,310

 
4,441

Available-for-sale securities
22,872

 
23,170

 
47,536

 
48,315

Held-to-maturity securities
20,021

 
22,218

 
40,375

 
44,388

Prepayment fees on investments
16

 
6

 
81

 
331

Total investment securities
45,666

 
47,599

 
93,302

 
97,475

Mortgage loans held for portfolio
30,989

 
29,906

 
60,936

 
60,982

Other
668

 
136

 
727

 
243

Total interest income
224,227

 
167,404

 
423,318

 
337,560

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
Bonds
104,168

 
89,780

 
202,343

 
180,640

Discount notes
55,068

 
22,579

 
92,647

 
45,276

Total consolidated obligations
159,236

 
112,359

 
294,990

 
225,916

Deposits
788

 
146

 
1,290

 
261

Mandatorily redeemable capital stock
377

 
319

 
706

 
698

Other borrowings
6

 
1

 
8

 
2

Total interest expense
160,407

 
112,825

 
296,994

 
226,877

NET INTEREST INCOME
63,820

 
54,579

 
126,324

 
110,683

Reduction of provision for credit losses
(125
)
 
(111
)
 
(176
)
 
(100
)
NET INTEREST INCOME AFTER REDUCTION OF PROVISION FOR CREDIT LOSSES
63,945

 
54,690

 
126,500

 
110,783

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investment securities
(37
)
 
(643
)
 
(90
)
 
(1,085
)
Net amount of impairment losses reclassified from accumulated other comprehensive loss
(531
)
 
(360
)
 
(896
)
 
(1,265
)
Net other-than-temporary impairment losses on investment securities, credit portion
(568
)
 
(1,003
)
 
(986
)
 
(2,350
)
Litigation settlements
—

 
19,584

 
—

 
19,584

Loss on early extinguishment of debt
—

 
(742
)
 
—

 
(1,300
)
Service fees
2,122

 
1,934

 
4,134

 
3,902

Net unrealized (losses) gains on trading securities
(852
)
 
84

 
(2,266
)
 
1,957

Net losses on derivatives and hedging activities
(418
)
 
(2,963
)
 
(382
)
 
(9,198
)
Other
168

 
(100
)
 
(39
)
 
(138
)
Total other income
452

 
16,794

 
461

 
12,457

OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
9,819

 
10,023

 
20,657

 
20,350

Other operating expenses
6,071

 
5,895

 
11,955

 
11,147

Federal Housing Finance Agency (the FHFA)
934

 
818

 
1,936

 
1,821

Office of Finance
745

 
726

 
1,587

 
1,542

Other
3,028

 
1,226

 
5,436

 
2,762

Total other expense
20,597

 
18,688

 
41,571

 
37,622

INCOME BEFORE ASSESSMENTS
43,800

 
52,796

 
85,390

 
85,618

AHP
4,418

 
5,312

 
8,610

 
8,632

NET INCOME
$
39,382

 
$
47,484

 
$
76,780

 
$
76,986

 

The accompanying notes are an integral part of these financial statements.

4
Table of Contents


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
39,382

 
$
47,484

 
$
76,780

 
$
76,986

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
 
15,594

 
27,941

 
42,500

 
79,771

Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
 
 
 
 
 
 
 
Net amount of impairment losses reclassified to non-interest income
 
531

 
359

 
896

 
1,264

Accretion of noncredit portion
 
8,119

 
9,211

 
16,415

 
18,352

Total net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
8,650

 
9,570

 
17,311

 
19,616

Net unrealized (losses) gains relating to hedging activities
 
 
 
 
 
 
 
 
Unrealized losses
 
(4,943
)
 
(9,731
)
 
(5,081
)
 
(26,770
)
Reclassification adjustment for previously deferred hedging gains and losses included in net income
 
3,395

 
6,893

 
7,714

 
14,104

Total net unrealized (losses) gains relating to hedging activities
 
(1,548
)
 
(2,838
)
 
2,633

 
(12,666
)
Pension and postretirement benefits
 
415

 
(2,585
)
 
609

 
(2,466
)
Total other comprehensive income
 
23,111

 
32,088

 
63,053

 
84,255

Comprehensive income
 
$
62,493

 
$
79,572

 
$
139,833

 
$
161,241


The accompanying notes are an integral part of these financial statements.

5
Table of Contents



FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
SIX MONTHS ENDED JUNE 30, 2017 AND 2016
(dollars and shares in thousands)
(unaudited)

 
 
 
 
 
 
 
 
 
Capital Stock Class B – Putable
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE, DECEMBER 31, 2015
23,367

 
$
2,336,662

 
$
934,214

 
$
194,634

 
$
1,128,848

 
$
(442,597
)
 
$
3,022,913

Comprehensive income
 
 
 
 
61,589

 
15,397

 
76,986

 
84,255

 
161,241

Proceeds from sale of capital stock
2,258

 
225,813

 
 
 
 
 
 
 
 
 
225,813

Repurchase of capital stock
(2,087
)
 
(208,737
)
 
 
 
 
 
 
 
 
 
(208,737
)
Shares reclassified to mandatorily redeemable capital stock
(1
)
 
(40
)
 
 
 
 
 
 
 
 
 
(40
)
Cash dividends on capital stock
 
 
 
 
(40,677
)
 
 
 
(40,677
)
 
 
 
(40,677
)
BALANCE, JUNE 30, 2016
23,537

 
$
2,353,698

 
$
955,126

 
$
210,031

 
$
1,165,157

 
$
(358,342
)
 
$
3,160,513

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2016
24,113

 
$
2,411,306

 
$
987,711

 
$
229,275

 
$
1,216,986

 
$
(383,514
)
 
$
3,244,778

Comprehensive income
 
 
 
 
61,424

 
15,356

 
76,780

 
63,053

 
139,833

Proceeds from sale of capital stock
5,238

 
523,765

 
 
 
 
 
 
 
 
 
523,765

Repurchase of capital stock
(5,178
)
 
(517,754
)
 
 
 
 
 
 
 
 
 
(517,754
)
Shares reclassified to mandatorily redeemable capital stock
(87
)
 
(8,670
)
 
 
 
 
 
 
 
 
 
(8,670
)
Cash dividends on capital stock
 
 
 
 
(48,441
)
 
 
 
(48,441
)
 
 
 
(48,441
)
BALANCE, JUNE 30, 2017
24,086

 
$
2,408,647

 
$
1,000,694

 
$
244,631

 
$
1,245,325

 
$
(320,461
)
 
$
3,333,511


The accompanying notes are an integral part of these financial statements.





6
Table of Contents



FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)


 
For the Six Months Ended June 30,
 
2017
 
2016
OPERATING ACTIVITIES
 

 
 

Net income
$
76,780

 
$
76,986

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
Depreciation and amortization
737

 
(10,722
)
Reduction of provision for credit losses
(176
)
 
(100
)
Change in net fair-value adjustments on derivatives and hedging activities
(2,207
)
 
23,851

Net other-than-temporary impairment losses on investment securities, credit portion
986

 
2,350

Loss on early extinguishment of debt
—

 
1,300

Other adjustments
3,749

 
1,018

Net change in:
 

 
 
Market value of trading securities
2,266

 
(1,957
)
Accrued interest receivable
(1,349
)
 
1,447

Other assets
(2,875
)
 
(15
)
Accrued interest payable
3,271

 
(5,170
)
Other liabilities
(4,273
)
 
(2,278
)
Total adjustments
129

 
9,724

Net cash provided by operating activities
76,909

 
86,710

 
 
 
 
INVESTING ACTIVITIES
 

 
 

Net change in:
 

 
 

Interest-bearing deposits
(262,731
)
 
(150,602
)
Securities purchased under agreements to resell
1,650,000

 
901,000

Federal funds sold
(1,760,000
)
 
(1,720,000
)
Premises, software, and equipment
(1,524
)
 
(848
)
Trading securities:
 

 
 

Proceeds
404,995

 
5,461

Purchases
(308,671
)
 
—

Available-for-sale securities:
 

 
 

Proceeds from long-term
587,243

 
530,343

Purchases of long-term
(617,156
)
 
(1,501,952
)
Held-to-maturity securities:
 

 
 

Proceeds from long-term
263,081

 
294,084

Advances to members:
 

 
 

Proceeds
253,472,443

 
173,556,118

Disbursements
(252,817,444
)
 
(175,623,844
)
Mortgage loans held for portfolio:
 

 
 

Proceeds
223,635

 
248,017

Purchases
(339,310
)
 
(300,648
)
Proceeds from sale of foreclosed assets
1,711

 
3,078

Net cash provided by (used in) investing activities
496,272

 
(3,759,793
)
 
 
 
 
FINANCING ACTIVITIES
 

 
 

Net change in deposits
(13,239
)
 
151,644

Net payments on derivatives with a financing element
(3,388
)
 
(6,707
)
Net proceeds from issuance of consolidated obligations:
 

 
 


7
Table of Contents


Discount notes
84,129,002

 
76,298,504

Bonds
5,376,043

 
9,716,022

Payments for maturing and retiring consolidated obligations:
 

 
 

Discount notes
(86,331,088
)
 
(74,297,930
)
Bonds
(4,027,290
)
 
(7,998,206
)
Proceeds from issuance of capital stock
523,765

 
225,813

Payments for redemption of mandatorily redeemable capital stock
(3,977
)
 
(6,953
)
Payments for repurchase of capital stock
(517,754
)
 
(208,737
)
Cash dividends paid
(48,434
)
 
(40,677
)
Net cash (used in) provided by financing activities
(916,360
)
 
3,832,773

Net (decrease) increase in cash and due from banks
(343,179
)
 
159,690

Cash and due from banks at beginning of the period
520,031

 
254,218

Cash and due from banks at end of the period
$
176,852

 
$
413,908

Supplemental disclosures:
 
 
 
Interest paid
$
300,048

 
$
254,901

AHP payments
$
10,491

 
$
7,025

Noncash transfers of mortgage loans held for portfolio to other assets
$
1,230

 
$
1,604


The accompanying notes are an integral part of these financial statements. 



8
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 



Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The presentation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2017. The unaudited financial statements should be read in conjunction with the Federal Home Loan Bank of Boston's audited financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (the SEC) on March 24, 2017 (the 2016 Annual Report). Unless otherwise indicated or the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston.

Note 2 — Summary of Significant Accounting Policies

As of June 30, 2017, we have not made any significant changes to the summary of significant accounting policies described in Item 8 — Financial Statements and Supplementary Data — Note 18 — Fair Values in the 2016 Annual Report other than described below.

We utilize two derivatives clearing organizations (DCOs), for all cleared derivative transactions, Chicago Mercantile Exchange, Inc. (CME Inc.) and LCH Limited (LCH Ltd.). Effective January 3, 2017, CME Inc. made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral transfers. We continue to characterize our variation margin related at LCH Ltd. contracts as cash collateral. At both DCOs, initial margin is considered cash collateral.

Note 3 — Recently Issued and Adopted Accounting Guidance

Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the Financial Accounting Standards Board (FASB) issued amended guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). This guidance is effective for us for interim and annual periods beginning on January 1, 2019, and early adoption is permitted. This guidance should be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Adoption of this guidance is not expected to have a material effect on our financial condition, results of operations, or cash flows.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On March 10, 2017, the FASB issued amended guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that employers disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This guidance is effective for us for interim and annual periods beginning on January 1, 2018, and early adoption is permitted. This guidance should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. Adoption of this guidance is not expected to have a material effect on our financial condition, results of operations, or cash flows.

Financial Instruments - Credit Losses. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events (including historical experience), current conditions, and reasonable and supportable forecasts

9
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected over the contractual term of the financial asset(s). The guidance also requires, among other things, the following:

•
The statement of income reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
•
Entities determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price.
•
Entities record credit losses relating to available-for-sale debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.
•
Public entities further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination.

This guidance is effective for us for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. This guidance is required to be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. We do not intend to adopt the new guidance early. While we are in the process of evaluating this guidance, we expect the adoption of the guidance will result in an increase in the allowance for credit losses given the requirement to assess losses for the entire estimated life of the financial asset. The effect on our financial condition, results of operations, and cash flows will depend upon the composition of our financial assets held at the adoption date as well as the economic conditions and forecasts at that time.

Contingent Put and Call Options in Debt Instruments. On March 14, 2016, the FASB issued amendments to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Specifically, the updated guidance clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. We adopted this guidance on January 1, 2017. The adoption of this guidance did not have any effect on our financial condition, results of operations, or cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:
•
Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in net income;
•
Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments;
•
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the statement of condition or the accompanying notes to the financial statements; and
•
Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the statement of condition.

This guidance becomes effective for us for the interim and annual periods beginning on January 1, 2018, and early adoption is only permitted for certain provisions. The amendments, in general, are required to be applied by means of a cumulative-effect adjustment on the statement of condition as of the beginning of the period of adoption. We do not invest in equity securities and we have not previously elected the fair value option for our own debt securities. Accordingly, adoption of this guidance is not

10
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


expected to have a material effect on our financial condition, results of operations, or cash flows, though it is expected to result in certain immaterial revisions to our disclosures.

Note 4 — Trading Securities
 
Major Security Types. Our trading securities as of June 30, 2017, and December 31, 2016, were (dollars in thousands):
 
June 30, 2017
 
December 31, 2016
U.S. Treasury obligations
$
309,332

 
$
399,521

 
 
 
 
Mortgage backed securities (MBS)
 

 
 
U.S. government-guaranteed – single-family
7,634

 
8,494

Government-sponsored enterprise (GSE)s – single-family
534

 
768

GSEs – multifamily
196,813

 
203,839

 
204,981

 
213,101

Total
$
514,313

 
$
612,622



Net unrealized losses or gains on trading securities for the six months ended June 30, 2017, and 2016, amounted to net losses of $2.3 million and net gains of $2.0 million for securities held on June 30, 2017, and 2016, respectively.

We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.

Note 5 — Available-for-Sale Securities

Major Security Types. Our available-for-sale securities as of June 30, 2017, were (dollars in thousands):

 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
State or local housing-finance-agency obligations (HFA securities)
$
16,950

 
$
—

 
$
(1,536
)
 
$
15,414

Supranational institutions
448,953

 
—

 
(26,775
)
 
422,178

U.S. government-owned corporations
318,140

 
—

 
(32,368
)
 
285,772

GSEs
130,770

 
—

 
(10,417
)
 
120,353

 
914,813

 
—

 
(71,096
)
 
843,717

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
112,759

 
55

 
(2,367
)
 
110,447

U.S. government guaranteed – multifamily
493,695

 
—

 
(2,458
)
 
491,237

GSEs – single-family
4,169,847

 
6,711

 
(27,861
)
 
4,148,697

GSEs – multifamily
1,044,991

 
3,882

 
(1,175
)
 
1,047,698

 
5,821,292

 
10,648

 
(33,861
)
 
5,798,079

Total
$
6,736,105

 
$
10,648

 
$
(104,957
)
 
$
6,641,796

_______________________
(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.

Our available-for-sale securities as of December 31, 2016, were (dollars in thousands):

11
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
HFA securities
$
9,350

 
$
—

 
$
(1,204
)
 
$
8,146

Supranational institutions
452,021

 
—

 
(29,401
)
 
422,620

U.S. government-owned corporations
317,588

 
—

 
(45,631
)
 
271,957

GSEs
130,798

 
—

 
(13,330
)
 
117,468

 
909,757

 
—

 
(89,566
)
 
820,191

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
127,032

 
16

 
(2,321
)
 
124,727

U.S. government guaranteed – multifamily
565,593

 
45

 
(2,277
)
 
563,361

GSEs – single-family
4,447,803

 
1,765

 
(45,713
)
 
4,403,855

GSEs – multifamily
675,288

 
1,242

 
—

 
676,530

 
5,815,716

 
3,068

 
(50,311
)
 
5,768,473

Total
$
6,725,473

 
$
3,068

 
$
(139,877
)
 
$
6,588,664

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.

The following table summarizes our available-for-sale securities with unrealized losses as of June 30, 2017, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
HFA securities
$
15,414

 
$
(1,536
)
 
$
—

 
$
—

 
$
15,414

 
$
(1,536
)
Supranational institutions
—

 
—

 
422,178

 
(26,775
)
 
422,178

 
(26,775
)
U.S. government-owned corporations
—

 
—

 
285,772

 
(32,368
)
 
285,772

 
(32,368
)
GSEs
—

 
—

 
120,353

 
(10,417
)
 
120,353

 
(10,417
)
 
15,414

 
(1,536
)
 
828,303

 
(69,560
)
 
843,717

 
(71,096
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
—

 
—

 
81,466

 
(2,367
)
 
81,466

 
(2,367
)
U.S. government guaranteed – multifamily
353,041

 
(1,479
)
 
138,196

 
(979
)
 
491,237

 
(2,458
)
GSEs – single-family
2,777,084

 
(21,541
)
 
361,515

 
(6,320
)
 
3,138,599

 
(27,861
)
GSEs – multifamily
394,996

 
(1,175
)
 
—

 
—

 
394,996

 
(1,175
)
 
3,525,121

 
(24,195
)
 
581,177

 
(9,666
)
 
4,106,298

 
(33,861
)
Total temporarily impaired
$
3,540,535

 
$
(25,731
)
 
$
1,409,480


$
(79,226
)

$
4,950,015


$
(104,957
)

The following table summarizes our available-for-sale securities with unrealized losses as of December 31, 2016, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):


12
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
HFA securities
$
8,146

 
$
(1,204
)
 
$
—

 
$
—

 
$
8,146

 
$
(1,204
)
Supranational institutions
—

 
—

 
422,620

 
(29,401
)
 
422,620

 
(29,401
)
U.S. government-owned corporations
—

 
—

 
271,957

 
(45,631
)
 
271,957

 
(45,631
)
GSEs
—

 
—

 
117,468

 
(13,330
)
 
117,468

 
(13,330
)
 
8,146

 
(1,204
)
 
812,045

 
(88,362
)
 
820,191

 
(89,566
)
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
31,606

 
(4
)
 
90,854

 
(2,317
)
 
122,460

 
(2,321
)
U.S. government guaranteed – multifamily
326,126

 
(1,261
)
 
165,246

 
(1,016
)
 
491,372

 
(2,277
)
GSEs – single-family
3,517,094

 
(39,181
)
 
351,331

 
(6,532
)
 
3,868,425

 
(45,713
)
 
3,874,826

 
(40,446
)
 
607,431

 
(9,865
)
 
4,482,257

 
(50,311
)
Total temporarily impaired
$
3,882,972

 
$
(41,650
)
 
$
1,419,476

 
$
(98,227
)
 
$
5,302,448

 
$
(139,877
)


Redemption Terms. The amortized cost and fair value of our available-for-sale securities by contractual maturity at June 30, 2017, and December 31, 2016, were (dollars in thousands):

 
June 30, 2017
 
December 31, 2016
Year of Maturity
Amortized
Cost
 
Fair
 Value
 
Amortized
Cost
 
Fair
 Value
Due in one year or less
$
—

 
$
—

 
$
—

 
$
—

Due after one year through five years
16,950

 
15,414

 
9,350

 
8,146

Due after five years through 10 years
170,161

 
159,254

 
171,589

 
161,746

Due after 10 years
727,702

 
669,049

 
728,818

 
650,299

 
914,813

 
843,717

 
909,757

 
820,191

MBS (1)
5,821,292

 
5,798,079

 
5,815,716

 
5,768,473

Total
$
6,736,105

 
$
6,641,796

 
$
6,725,473

 
$
6,588,664

_______________________
(1)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees.

Note 6 — Held-to-Maturity Securities

Major Security Types. Our held-to-maturity securities as of June 30, 2017, were (dollars in thousands):


13
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
1,602

 
$
—

 
$
1,602

 
$
29

 
$
—

 
$
1,631

HFA securities
159,689

 
—

 
159,689

 
10

 
(15,856
)
 
143,843

 
161,291

 
—

 
161,291

 
39

 
(15,856
)
 
145,474

MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
11,427

 
—

 
11,427

 
243

 
—

 
11,670

U.S. government guaranteed – multifamily
800

 
—

 
800

 
—

 
(1
)
 
799

GSEs – single-family
678,107

 
—

 
678,107

 
14,115

 
(292
)
 
691,930

GSEs – multifamily
295,130

 
—

 
295,130

 
10,271

 
—

 
305,401

Private-label – residential
913,841

 
(174,537
)
 
739,304

 
259,043

 
(5,702
)
 
992,645

Asset-backed securities (ABS) backed by home equity loans
12,568

 
(530
)
 
12,038

 
581

 
(485
)
 
12,134

 
1,911,873

 
(175,067
)
 
1,736,806

 
284,253

 
(6,480
)
 
2,014,579

Total
$
2,073,164

 
$
(175,067
)
 
$
1,898,097

 
$
284,292

 
$
(22,336
)
 
$
2,160,053


Our held-to-maturity securities as of December 31, 2016, were (dollars in thousands):
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
2,159

 
$
—

 
$
2,159

 
$
56

 
$
—

 
$
2,215

HFA securities
162,568

 
—

 
162,568

 
11

 
(19,291
)
 
143,288

 
164,727

 
—

 
164,727

 
67

 
(19,291
)
 
145,503

MBS
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed – single-family
12,719

 
—

 
12,719

 
246

 
—

 
12,965

U.S. government guaranteed – multifamily
1,532

 
—

 
1,532

 
—

 
—

 
1,532

GSEs – single-family
812,836

 
—

 
812,836

 
16,881

 
(519
)
 
829,198

GSEs – multifamily
318,667

 
—

 
318,667

 
11,692

 
—

 
330,359

Private-label – residential
999,149

 
(191,804
)
 
807,345

 
240,818

 
(8,373
)
 
1,039,790

ABS backed by home equity loans
13,515

 
(574
)
 
12,941

 
602

 
(600
)
 
12,943

 
2,158,418

 
(192,378
)
 
1,966,040

 
270,239

 
(9,492
)
 
2,226,787

Total
$
2,323,145

 
$
(192,378
)
 
$
2,130,767

 
$
270,306

 
$
(28,783
)
 
$
2,372,290



The following table summarizes our held-to-maturity securities with unrealized losses as of June 30, 2017, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).

14
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
—

 
$
—

 
$
141,514

 
$
(15,856
)
 
$
141,514

 
$
(15,856
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

U.S. government guaranteed - multifamily
799

 
(1
)
 
—

 
—

 
799

 
(1
)
GSEs – single-family
15,928

 
(191
)
 
17,590

 
(101
)
 
33,518

 
(292
)
Private-label – residential
—

 
—

 
284,674

 
(15,614
)
 
284,674

 
(15,614
)
ABS backed by home equity loans
—

 
—

 
11,143

 
(601
)
 
11,143

 
(601
)
 
16,727

 
(192
)
 
313,407

 
(16,316
)
 
330,134

 
(16,508
)
Total
$
16,727

 
$
(192
)
 
$
454,921

 
$
(32,172
)
 
$
471,648

 
$
(32,364
)

The following table summarizes our held-to-maturity securities with unrealized losses as of December 31, 2016, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
—

 
$
—

 
$
140,959

 
$
(19,291
)
 
$
140,959

 
$
(19,291
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – single-family
83,291

 
(393
)
 
13,405

 
(126
)
 
96,696

 
(519
)
Private-label – residential
16,915

 
(128
)
 
397,407

 
(28,781
)
 
414,322

 
(28,909
)
ABS backed by home equity loans
—

 
—

 
11,898

 
(720
)
 
11,898

 
(720
)
 
100,206

 
(521
)
 
422,710

 
(29,627
)
 
522,916

 
(30,148
)
Total
$
100,206

 
$
(521
)
 
$
563,669

 
$
(48,918
)
 
$
663,875

 
$
(49,439
)


Redemption Terms. The amortized cost, carrying value, and fair value of our held-to-maturity securities by contractual maturity at June 30, 2017, and December 31, 2016, are shown below (dollars in thousands). Expected maturities of some securities and MBS may differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.
 
June 30, 2017
 
December 31, 2016
Year of Maturity
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
Due in one year or less
$
109

 
$
109

 
$
111

 
$
—

 
$
—

 
$
—

Due after one year through five years
15,972

 
15,972

 
15,974

 
16,637

 
16,637

 
16,663

Due after five years through 10 years
—

 
—

 
—

 
—

 
—

 
—

Due after 10 years
145,210

 
145,210

 
129,389

 
148,090

 
148,090

 
128,840

 
161,291

 
161,291

 
145,474

 
164,727

 
164,727

 
145,503

MBS (2)
1,911,873

 
1,736,806

 
2,014,579

 
2,158,418

 
1,966,040

 
2,226,787

Total
$
2,073,164

 
$
1,898,097

 
$
2,160,053

 
$
2,323,145

 
$
2,130,767

 
$
2,372,290

_______________________
(1)
Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related other-than-temporary impairment recognized in accumulated other comprehensive loss.

15
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


(2)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.

Note 7 — Other-Than-Temporary Impairment

We evaluate our individual available-for-sale and held-to-maturity securities for other-than-temporary impairment each quarter.

Available-for-Sale Securities

We determined that none of our available-for-sale securities were other-than-temporarily impaired at June 30, 2017. At June 30, 2017, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. We consider these unrealized losses temporary because we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security.

Held-to-Maturity Securities

HFA Securities and Agency MBS. We have reviewed our investments in HFA securities and agency MBS and have determined that all unrealized losses are temporary. We do not intend to sell the investments nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis. We do not consider these investments to be other-than-temporarily impaired at June 30, 2017.

Private-Label Residential MBS and ABS Backed by Home Equity Loans. For those securities for which a credit loss was recognized during the six months ended June 30, 2017, the following table presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted average of Alt-A other-than-temporarily impaired private-label residential MBS (dollars in thousands).
 
 
 
 
Weighted Average of Significant Inputs
 
Weighted Average Current
Credit Enhancement
Private-label MBS by Classification
 
Par Value
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Alt-A - Private-label residential MBS (1)
 
$
66,522

 
8.4
%
 
26.8
%
 
35.5
%
 
11.1
%
_______________________
(1)
Securities are classified based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.

The following table sets forth our securities for which other-than-temporary impairment credit losses were recognized during the life of the security through June 30, 2017 (dollars in thousands). Securities are classified in the table below based on their classifications at the time of issuance.
 
June 30, 2017
Other-Than-Temporarily Impaired Investment (1)
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
34,924

 
$
30,001

 
$
23,642

 
$
31,335

Private-label residential MBS – Alt-A
1,018,372

 
753,997

 
585,819

 
837,054

ABS backed by home equity loans – Subprime
3,556

 
3,259

 
2,729

 
3,310

Total other-than-temporarily impaired securities
$
1,056,852

 
$
787,257

 
$
612,190

 
$
871,699


_______________________

16
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


(1)
We have instituted litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.

The following table presents a roll-forward of the amounts related to credit losses recognized in earnings. The roll-forward is the amount of credit losses on investment securities for which we recognized a portion of other-than-temporary impairment charges into accumulated other comprehensive loss (dollars in thousands).
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
482,221

 
$
525,809

 
$
490,404

 
$
533,888

Additions:
 
 
 
 
 
 
 
Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1)
568

 
1,003

 
986

 
2,350

Reductions:
 
 
 
 
 
 
 
Securities matured during the period(2)
(5,565
)
 
—

 
(5,565
)
 
—

Increase in cash flows expected to be collected which are recognized over the remaining life of the security(3)
(8,518
)
 
(9,890
)
 
(17,119
)
 
(19,316
)
Balance at end of period
$
468,706

 
$
516,922

 
$
468,706

 
$
516,922

_______________________
(1)
For the three months ended June 30, 2017 and 2016, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to April 1, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to January 1, 2017 and 2016, respectively.
(2)
Represents reductions related to securities having reached final maturity during the period and, therefore, are no longer held by us at the end of the period.
(3)
Represents amounts accreted as interest income during the current period.

Note 8 — Advances

General Terms. At both June 30, 2017, and December 31, 2016, we had advances outstanding with interest rates ranging from zero percent to 7.72 percent as summarized below (dollars in thousands).

17
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
June 30, 2017
 
December 31, 2016
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
$
3,046

 
1.45
%
 
$
3,780

 
0.92
%
Due in one year or less
20,369,559

 
1.35

 
18,783,802

 
1.05

Due after one year through two years
8,740,980

 
1.50

 
10,966,780

 
1.15

Due after two years through three years
3,005,963

 
1.78

 
2,508,459

 
1.67

Due after three years through four years
2,034,081

 
1.75

 
2,177,432

 
1.64

Due after four years through five years
1,931,339

 
1.97

 
2,041,269

 
1.80

Thereafter
2,375,221

 
1.81

 
2,633,333

 
1.70

Total par value
38,460,189

 
1.50
%
 
39,114,855

 
1.23
%
Premiums
19,735

 
 

 
22,633

 
 

Discounts
(30,900
)
 
 

 
(25,847
)
 
 

Fair value of bifurcated derivatives (1)
640

 
 
 
(153
)
 
 
Hedging adjustments
(22,048
)
 
 

 
(12,149
)
 
 

Total
$
38,427,616

 
 

 
$
39,099,339

 
 


_________________________
(1)
At June 30, 2017, and December 31, 2016, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives.

At June 30, 2017, and December 31, 2016, we had callable advances and floating-rate advances that may be prepaid on a floating-rate reset date without prepayment or termination fees outstanding totaling $5.7 billion and $7.9 billion, respectively.

The following table sets forth our advances outstanding by the year of contractual maturity or next call date for callable advances (dollars in thousands):
Year of Contractual Maturity or Next Call Date (1), Par Value
June 30, 2017
 
December 31, 2016
Overdrawn demand-deposit accounts
$
3,046

 
$
3,780

Due in one year or less
25,883,734

 
26,447,977

Due after one year through two years
3,627,980

 
3,693,780

Due after two years through three years
3,005,963

 
2,508,459

Due after three years through four years
1,848,881

 
2,002,232

Due after four years through five years
1,769,339

 
1,891,269

Thereafter
2,321,246

 
2,567,358

Total par value
$
38,460,189

 
$
39,114,855

_______________________
(1)
Also includes certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

At June 30, 2017, and December 31, 2016, we had putable advances outstanding totaling $2.6 billion and $3.4 billion, respectively.

The following table sets forth our advances outstanding by the year of contractual maturity or next put date for putable advances (dollars in thousands):

18
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


Year of Contractual Maturity or Next Put Date, Par Value
June 30, 2017
 
December 31, 2016
Overdrawn demand-deposit accounts
$
3,046

 
$
3,780

Due in one year or less
22,092,559

 
20,788,552

Due after one year through two years
8,946,230

 
10,946,530

Due after two years through three years
2,922,963

 
2,455,709

Due after three years through four years
1,847,081

 
1,974,932

Due after four years through five years
1,631,339

 
1,736,769

Thereafter
1,016,971

 
1,208,583

Total par value
$
38,460,189

 
$
39,114,855



Interest-Rate-Payment Terms. The following table details interest-rate-payment types for our outstanding advances (dollars in thousands):
Par value of advances
June 30, 2017
 
December 31, 2016
Fixed-rate
$
32,303,868

 
$
30,526,192

Variable-rate
6,156,321

 
8,588,663

Total par value
$
38,460,189

 
$
39,114,855



Credit-Risk Exposure and Security Terms. At June 30, 2017, and December 31, 2016, we had $12.2 billion and $16.2 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to five borrowers and six borrowers, respectively, as of June 30, 2017, and December 31, 2016, representing 31.7 percent and 41.5 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 10 — Allowance for Credit Losses.

Note 9 — 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 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 following table presents certain characteristics of these investments (dollars in thousands):
 
June 30, 2017
 
December 31, 2016
Real estate
 

 
 

Fixed-rate 15-year single-family mortgages
$
500,527

 
$
528,486

Fixed-rate 20- and 30-year single-family mortgages
3,235,321

 
3,098,476

Premiums
68,395

 
67,523

Discounts
(1,613
)
 
(1,696
)
Deferred derivative gains, net
2,451

 
1,755

Total mortgage loans held for portfolio
3,805,081

 
3,694,544

Less: allowance for credit losses
(500
)
 
(650
)
Total mortgage loans, net of allowance for credit losses
$
3,804,581

 
$
3,693,894



The following table details the par value of mortgage loans held for portfolio (dollars in thousands):

19
Table of Contents


 
June 30, 2017
 
December 31, 2016
Conventional mortgage loans
$
3,357,891

 
$
3,235,835

Government mortgage loans
377,957

 
391,127

Total par value
$
3,735,848

 
$
3,626,962



See Note 10 — Allowance for Credit Losses for information related to our credit risk from our investments in mortgage loans and allowance for credit losses based on these investments.

"Mortgage Partnership Finance," and "MPF" are registered trademarks of the Federal Home Loan Bank of Chicago.

Note 10 — Allowance for Credit Losses

An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2016 Annual Report.

Secured Member Credit Products

We manage our credit exposure to secured member credit products through an integrated approach that generally includes establishing a credit limit for each borrower, 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.

At June 30, 2017, and December 31, 2016, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during the six months ended June 30, 2017 and 2016.

Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at June 30, 2017, and December 31, 2016. At June 30, 2017, and December 31, 2016, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 18 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2016 Annual Report.

Government Mortgage Loans Held for Portfolio

Based on our assessment of our servicers for our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of June 30, 2017, and December 31, 2016. In addition, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2016 Annual Report.

Conventional Mortgage Loans Held for Portfolio

For information on our conventional mortgage loans held for portfolio see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2016 Annual Report.


20
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. The tables below set forth certain key credit quality indicators for our investments in mortgage loans at June 30, 2017, and December 31, 2016 (dollars in thousands):
 
June 30, 2017
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
23,951

 
$
11,324

 
$
35,275

Past due 60-89 days delinquent
6,401

 
3,642

 
10,043

Past due 90 days or more delinquent
12,727

 
4,985

 
17,712

Total past due
43,079

 
19,951

 
63,030

Total current loans
3,392,655

 
368,309

 
3,760,964

Total mortgage loans
$
3,435,734

 
$
388,260

 
$
3,823,994

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
6,031

 
$
1,297

 
$
7,328

Serious delinquency rate (2)
0.39
%
 
1.28
%
 
0.48
%
Past due 90 days or more still accruing interest
$
—

 
$
4,985

 
$
4,985

Loans on nonaccrual status (3)
$
13,006

 
$
—

 
$
13,006

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

 
December 31, 2016
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
26,757

 
$
14,878

 
$
41,635

Past due 60-89 days delinquent
5,508

 
3,846

 
9,354

Past due 90 days or more delinquent
16,379

 
5,807

 
22,186

Total past due
48,644

 
24,531

 
73,175

Total current loans
3,262,671

 
377,438

 
3,640,109

Total mortgage loans
$
3,311,315

 
$
401,969

 
$
3,713,284

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
7,495

 
$
1,502

 
$
8,997

Serious delinquency rate (2)
0.53
%
 
1.44
%
 
0.63
%
Past due 90 days or more still accruing interest
$
—

 
$
5,807

 
$
5,807

Loans on nonaccrual status (3)
$
16,940

 
$
—

 
$
16,940

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.

21
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

For information on how we collectively and individually evaluate mortgage loans for impairment see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2016 Annual Report.

Individually Evaluated Impaired Loans. The following tables present the recorded investment, par value and any related allowance for impaired loans individually assessed for impairment at June 30, 2017, and December 31, 2016, and the average recorded investment and interest income recognized on these loans during the three and six months ended June 30, 2017 and 2016 (dollars in thousands).
 
 
As of June 30, 2017
 
As of December 31, 2016
 
 
Recorded Investment
 
Par Value
 
Recorded Investment
 
Par Value
Individually evaluated impaired mortgage loans with no related allowance
 
$
18,709

 
$
18,672

 
$
22,945

 
$
22,905



 
 
For the Three Months Ended June 30,
 
 
2017
 
2016
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
19,367

 
$
107

 
$
24,770

 
$
102



 
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
20,324

 
$
223

 
$
25,217

 
$
182



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-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.

Previously, conventional mortgage loans were required to be credit enhanced so that the risk of loss was limited to the losses equivalent to an investment in a double-A rated MBS at the time of purchase. The FHFA final rule on acquired member assets (AMA) went into effect on January 18, 2017, allowing each FHLBank to utilize its own model to determine the credit enhancement for AMA loan assets and pool loans in lieu of a nationally recognized statistical ratings organization (NRSRO) ratings model. Upon effectiveness of the final AMA rule, we determined that assets delivered to us must be credit enhanced at our determined “AMA investment grade” of a double-A rated MBS. In March 2017, we determined that assets delivered to us must be credit enhanced at our revised determination of “AMA investment grade” of a single-A-minus rated MBS. This revision had no impact on the June 30, 2017, allowance for credit losses. We share the risk of credit losses on our investments in mortgage loans with the related participating financial institution by structuring potential losses on these investments into layers with respect to each master commitment. We analyze the risk characteristics of our mortgage loans using a third-party model to determine the credit enhancement amount at the time of purchase. This credit-enhancement amount is broken into a first-loss account and a credit-enhancement obligation of each participating financial institution, which may be calculated based on the risk analysis to equal the difference between the amounts needed for the master commitment to have a rating equivalent to a single-A-minus rated MBS and our initial first-loss account exposure.

22
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 



Roll-Forward of Allowance for Credit Losses on Mortgage Loans. The following table presents a roll-forward of the allowance for credit losses on conventional mortgage loans for the three and six months ended June 30, 2017 and 2016, as well as the recorded investment in mortgage loans by impairment methodology at June 30, 2017 and 2016 (dollars in thousands). 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.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Allowance for credit losses
 
 
 
 
 
 
 
Balance, beginning of period
$
625

 
$
1,025

 
$
650

 
$
1,025

Recoveries (charge-offs)
—

 
(14
)
 
26

 
(25
)
Reduction of provision for credit losses
(125
)
 
(111
)
 
(176
)
 
(100
)
Balance, end of period
$
500

 
$
900

 
$
500

 
$
900

Ending balance, individually evaluated for impairment
$
—

 
$
—

 
$
—

 
$
—

Ending balance, collectively evaluated for impairment
$
500

 
$
900

 
$
500

 
$
900

Recorded investment, end of period (1)
 
 
 
 
 
 
 
Individually evaluated for impairment
$
18,709

 
$
24,583

 
$
18,709

 
$
24,583

Collectively evaluated for impairment
$
3,417,025

 
$
3,208,989

 
$
3,417,025

 
$
3,208,989

_________________________
(1)
These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed above under — Government Mortgage Loans Held for Portfolio.

Note 11 — Derivatives and Hedging Activities

The following table presents the notional amount and fair value of derivatives (excluding fair value adjustments related to variation margin for daily settled contracts) and total derivatives assets and liabilities. Total derivative asset and liabilities include the effect of netting adjustments, cash collateral, and variation margin for daily settled contracts as of June 30, 2017, and December 31, 2016 (dollars in thousands):

23
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
June 30, 2017
 
December 31, 2016
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 

 
 

 
 

 
 
 
 
 
 
Interest-rate swaps
$
16,212,840

 
$
41,631

 
$
(369,601
)
 
$
18,215,809

 
$
52,715

 
$
(413,026
)
Forward-start interest-rate swaps
527,800

 
—

 
(41,099
)
 
527,800

 
—

 
(36,250
)
Total derivatives designated as hedging instruments
16,740,640

 
41,631

 
(410,700
)
 
18,743,609

 
52,715

 
(449,276
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps
1,050,900

 
1,132

 
(8,589
)
 
1,199,000

 
2,293

 
(10,840
)
Mortgage-delivery commitments (1)
71,314

 
99

 
(197
)
 
22,524

 
70

 
(171
)
Total derivatives not designated as hedging instruments
1,122,214

 
1,231

 
(8,786
)
 
1,221,524

 
2,363

 
(11,011
)
Total notional amount of derivatives
$
17,862,854

 
 

 
 

 
$
19,965,133

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
42,862

 
(419,486
)
 
 
 
55,078

 
(460,287
)
Netting adjustments, cash collateral, and variation margin for daily settled contracts including related accrued interest (2)
 

 
13,761

 
90,257

 
 
 
6,520

 
102,411

Derivative assets and derivative liabilities
 

 
$
56,623

 
$
(329,229
)
 
 
 
$
61,598

 
$
(357,876
)
_______________________
(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $62.0 million and $109.8 million at June 30, 2017, and December 31, 2016, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $601,000 and $850,000 at June 30, 2017, and December 31, 2016, respectively. Variation margin for daily settled contracts was $42.6 million at June 30, 2017.

Net (losses) gains on derivatives and hedging activities recorded in Other Income (Loss) for the three and six months ended June 30, 2017 and 2016, were as follows (dollars in thousands):

24
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest-rate swaps
 
$
(752
)
 
$
(2,218
)
 
$
(1,411
)
 
$
(5,251
)
Forward-start interest-rate swaps
 
97

 
(190
)
 
231

 
(536
)
Total net losses related to derivatives designated as hedging instruments
 
(655
)
 
(2,408
)
 
(1,180
)
 
(5,787
)
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
Interest-rate swaps
 
(375
)
 
(1,245
)
 
(222
)
 
(4,717
)
Mortgage-delivery commitments
 
507

 
690

 
864

 
1,306

Total net gains (losses) related to derivatives not designated as hedging instruments
 
132

 
(555
)
 
642

 
(3,411
)
 
 
 
 
 
 
 
 
 
Other(1)
 
105

 
—

 
156

 
—

 
 
 
 
 
 
 
 
 
Net losses on derivatives and hedging activities
 
$
(418
)
 
$
(2,963
)
 
$
(382
)
 
$
(9,198
)

______________
(1)
Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedge relationships and the impact of those derivatives on our net interest income for the three and six months ended June 30, 2017 and 2016 (dollars in thousands):
 
For the Three Months Ended June 30, 2017
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
(11,327
)
 
$
10,554

 
$
(773
)
 
$
(8,283
)
Investments
(6,863
)
 
7,264

 
401

 
(8,099
)
COs – bonds
17,719

 
(18,099
)
 
(380
)
 
2,082

Total
$
(471
)
 
$
(281
)
 
$
(752
)
 
$
(14,300
)


 
For the Three Months Ended June 30, 2016
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
(25,621
)
 
$
24,655

 
$
(966
)
 
$
(26,128
)
Investments
(26,830
)
 
27,186

 
356

 
(8,883
)
COs – bonds
564

 
(2,172
)
 
(1,608
)
 
7,158

Total
$
(51,887
)
 
$
49,669

 
$
(2,218
)
 
$
(27,853
)

25
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
For the Six Months Ended June 30, 2017
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
9,768

 
$
(9,899
)
 
$
(131
)
 
$
(21,688
)
Investments
3,405

 
(2,544
)
 
861

 
(16,440
)
COs – bonds
17,795

 
(19,936
)
 
(2,141
)
 
6,723

Total
$
30,968

 
$
(32,379
)
 
$
(1,411
)
 
$
(31,405
)

 
For the Six Months Ended June 30, 2016
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
(94,077
)
 
$
92,888

 
$
(1,189
)
 
$
(56,252
)
Investments
(76,285
)
 
77,025

 
740

 
(17,894
)
COs – bonds
10,831

 
(15,633
)
 
(4,802
)
 
15,230

Total
$
(159,531
)
 
$
154,280

 
$
(5,251
)
 
$
(58,916
)
______________
(1)
The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.

The following table presents the losses recognized in accumulated other comprehensive loss, the losses reclassified from accumulated other comprehensive loss into income, and the effect of our hedging activities on our net losses on derivatives and hedging activities in the statement of income for our forward-start interest-rate swaps associated with hedged CO bonds in cash-flow hedge relationships (dollars in thousands).
Derivatives and Hedged Items in Cash Flow Hedging Relationships
 
Losses Recognized in Other Comprehensive Loss on Derivatives
(Effective Portion)
 
Location of Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Gains (Losses) Recognized in Net Losses on Derivatives and Hedging Activities
(Ineffective Portion)
Interest-rate swaps - CO bonds
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2017
 
$
(4,943
)
 
Interest expense
 
$
(3,392
)
 
$
97

For the Three Months Ended June 30, 2016
 
(9,731
)
 
Interest expense
 
(6,889
)
 
(190
)
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2017
 
(5,081
)
 
Interest expense
 
(7,707
)
 
231

For the Six Months Ended June 30, 2016
 
(26,770
)
 
Interest expense
 
(14,097
)
 
(536
)


For the six months ended June 30, 2017 and 2016, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of June 30, 2017, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is seven years.

As of June 30, 2017, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $4.9 million.

Managing Credit Risk on Derivatives. We enter into derivatives that we clear (cleared derivatives) with a DCO, our counterparty for such derivatives. We also enter into derivatives that are not cleared (uncleared derivatives) under master-

26
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


netting agreements. Certain of our uncleared derivatives master-netting agreements contain provisions that require us to post additional collateral with our uncleared derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's Investors Services (Moody's) or Standard & Poor's Rating Service (S&P) to a certain level, we are required to deliver additional collateral on uncleared derivatives in a net liability position. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at June 30, 2017, was $351.4 million for which we had delivered collateral with a post-haircut value of $326.5 million in accordance with the terms of the master-netting agreements. Securities collateral is subject to valuation haircuts in accordance with the terms of the master-netting arrangements. The following table sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver in case of an incremental credit rating downgrades at June 30, 2017.

Post Haircut Value of Incremental Collateral to be Delivered
 as of June 30, 2017
(dollars in thousands)
Ratings Downgrade (1)
 
 
From
 
To
 
Incremental Collateral
AA+
 
AA or AA-
 
$
9,858

AA-
 
A+, A or A-
 
6,250

A-
 
below A-
 
22,670

_______________________
(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.

For cleared derivatives, the DCO is our counterparty. The DCO notifies the clearing member of the required initial and variation margin and our agent (clearing member) in turn notifies us. We utilize two DCOs, for all cleared derivative transactions, CME Inc. and LCH Ltd. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook, changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. We continue to characterize our variation margin related to LCH Ltd. contracts as cash collateral. At both DCOs, initial margin is considered cash collateral. We post initial margin and exchange variation margin through a clearing member who acts as our agent to the DCO and who 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.

We have analyzed the rights, rules, and regulations governing our cleared derivatives and determined that those rights, rules, and regulations should result in a net claim through each of our clearing members with the related DCO upon an event of default including a bankruptcy, insolvency or similar proceeding involving the DCO or one of our clearing members, or both. For this purpose, net claim generally means a single net amount reflecting the aggregation of all amounts indirectly owed by us to the relevant DCO and indirectly payable to us from the relevant DCO.

For cleared derivatives, the DCO determines initial margin requirements. We clear our trades via clearing members of the DCOs. The clearing members who act as our agent to the DCOs are U.S. Commodity Futures Trading Commission (the CFTC) registered futures commission merchants. Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at June 30, 2017.

Offsetting of Certain Derivatives. We present derivatives, any related cash collateral, including initial and certain variation margin, received or pledged, and associated accrued interest, on a net basis by counterparty.

The following table presents separately the fair value of derivatives that are subject to netting due to a legal right of offset

27
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


based on the terms of our master netting arrangements or similar agreements as of June 30, 2017, and December 31, 2016 and the fair value of derivatives that are not subject to such netting (dollars in thousands). Such netting includes any related cash collateral received from or pledged to counterparties and variation margin for daily settled contracts.

 
 
June 30, 2017
 
December 31, 2016
 
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Derivatives meeting netting requirements
 
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
 
Uncleared derivatives
 
$
9,168

 
$
(359,879
)
 
$
12,594

 
$
(405,310
)
Cleared derivatives
 
33,595

 
(59,410
)
 
42,414

 
(54,806
)
Total gross recognized amount
 
42,763

 
(419,289
)
 
55,008

 
(460,116
)
Gross amounts of netting adjustments, cash collateral, and variation margin for daily settled contracts
 
 
 
 
 
 
 
 
Uncleared derivatives
 
(8,377
)
 
30,847

 
(12,028
)
 
47,605

Cleared derivatives
 
22,138

 
59,410

 
18,548

 
54,806

Total gross amounts of netting adjustments, cash collateral, and variation margin for daily settled contracts
 
13,761

 
90,257

 
6,520

 
102,411

Net amounts after netting adjustments, cash collateral, and variation margin for daily settled contracts
 
 
 
 
 
 
 
 
Uncleared derivatives
 
791

 
(329,032
)
 
566

 
(357,705
)
Cleared derivatives
 
55,733

 
—

 
60,962

 
—

Total net amounts after netting adjustments, cash collateral, and variation margin for daily settled contracts
 
56,524

 
(329,032
)
 
61,528

 
(357,705
)
Derivatives not meeting netting requirements
 
 
 
 
 
 
 
 
Mortgage delivery commitments
 
99

 
(197
)
 
70

 
(171
)
Total derivative assets and total derivative liabilities
 
 
 
 
 
 
 
 
Uncleared derivatives
 
791

 
(329,032
)
 
566

 
(357,705
)
Cleared derivatives
 
55,733

 
—

 
60,962

 
—

Mortgage delivery commitments
 
99

 
(197
)
 
70

 
(171
)
Total derivative assets and total derivative liabilities presented in the statement of condition
 
56,623

 
(329,229
)
 
61,598

 
(357,876
)
 
 
 
 
 
 
 
 
 
Non-cash collateral received or pledged not offset (1)
 
 
 
 
 
 
 
 
Can be sold or repledged
 
 
 
 
 
 
 
 
Uncleared derivatives
 
—

 
11,933

 
—

 
30,306

Cannot be sold or repledged
 
 
 
 
 
 
 
 
Uncleared derivatives
 
—

 
297,802

 
—

 
290,444

Total non-cash collateral received or pledged, not offset
 
—

 
309,735

 
—

 
320,750

 Net amount
 
 
 
 
 
 
 
 
Uncleared derivatives
 
791

 
(19,297
)
 
566

 
(36,955
)
Cleared derivatives
 
55,733

 
—

 
60,962

 
—

Mortgage delivery commitments
 
99

 
(197
)
 
70

 
(171
)
Total net amount
 
$
56,623

 
$
(19,494
)
 
$
61,598

 
$
(37,126
)
_______________________

28
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


(1)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At June 30, 2017, and December 31, 2016, we had additional net credit exposure of $118,000 and $2.0 million, respectively, due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 12 — Deposits

We offer demand and overnight deposits for members and qualifying nonmembers. In addition, we offer short-term interest-bearing deposit programs to members. We classify these items as "other" in the following table.

The following table details interest- and noninterest-bearing deposits (dollars in thousands):
 
June 30, 2017
 
December 31, 2016
Interest-bearing
 

 
 
Demand and overnight
$
436,800

 
$
440,731

Other
4,510

 
4,166

Noninterest-bearing
 

 
 

Other
27,863

 
37,266

Total deposits
$
469,173

 
$
482,163



Note 13 — Consolidated Obligations

COs - Bonds. The following table sets forth the outstanding CO bonds for which we were primarily liable at June 30, 2017, and December 31, 2016, by year of contractual maturity (dollars in thousands):
 
June 30, 2017
 
December 31, 2016
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate (1)
 
Amount
 
Weighted
Average
Rate (1)
 
 

 
 

 
 

 
 

Due in one year or less
$
12,230,385

 
1.33
%
 
$
8,734,955

 
1.43
%
Due after one year through two years
6,320,065

 
1.36

 
7,752,420

 
1.19

Due after two years through three years
3,080,645

 
1.86

 
3,297,120

 
1.63

Due after three years through four years
1,817,190

 
1.79

 
1,637,335

 
1.87

Due after four years through five years
1,965,545

 
1.77

 
2,574,375

 
1.65

Thereafter
3,060,590

 
2.70

 
3,135,745

 
2.70

Total par value
28,474,420

 
1.60
%
 
27,131,950

 
1.58
%
Premiums
101,843

 
 

 
118,145

 
 

Discounts
(14,020
)
 
 

 
(14,906
)
 
 

Hedging adjustments
(43,819
)
 
 

 
(63,755
)
 
 

 
$
28,518,424

 
 

 
$
27,171,434

 
 

_______________________
(1)
The CO bonds' weighted-average rate excludes concession fees.

Our CO bonds outstanding at June 30, 2017, and December 31, 2016, included (dollars in thousands):
 
June 30, 2017
 
December 31, 2016
Par value of CO bonds
 

 
 

Noncallable and nonputable
$
24,456,420

 
$
22,388,950

Callable
4,018,000

 
4,743,000

Total par value
$
28,474,420

 
$
27,131,950



29
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 



The following is a summary of the CO bonds for which we were primarily liable at June 30, 2017, and December 31, 2016, by year of contractual maturity or next call date for callable CO bonds (dollars in thousands):
Year of Contractual Maturity or Next Call Date
 
June 30, 2017
 
December 31, 2016
Due in one year or less
 
$
15,325,385

 
$
12,858,955

Due after one year through two years
 
6,170,065

 
7,013,420

Due after two years through three years
 
2,952,645

 
2,904,120

Due after three years through four years
 
1,254,190

 
1,289,335

Due after four years through five years
 
1,003,545

 
1,242,375

Thereafter
 
1,768,590

 
1,823,745

Total par value
 
$
28,474,420

 
$
27,131,950



The following table sets forth the CO bonds for which we were primarily liable by interest-rate-payment type at June 30, 2017, and December 31, 2016 (dollars in thousands):
 
June 30, 2017
 
December 31, 2016
Par value of CO bonds
 

 
 

Fixed-rate
$
20,357,420

 
$
20,289,950

Simple variable-rate
6,665,000

 
5,300,000

Step-up
1,452,000

 
1,542,000

Total par value
$
28,474,420

 
$
27,131,950



COs – Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows (dollars in thousands):
 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
June 30, 2017
$
27,865,529

 
$
27,892,943

 
0.95
%
December 31, 2016
$
30,053,964

 
$
30,070,103

 
0.47
%
_______________________
(1)
The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.

Note 14 — Affordable Housing Program

The following table presents a roll-forward of the AHP liability for the six months ended June 30, 2017, and year ended December 31, 2016 (dollars in thousands):
 
June 30, 2017
 
December 31, 2016
Balance at beginning of period
$
81,627

 
$
82,081

AHP expense for the period
8,610

 
19,397

AHP direct grant disbursements
(10,491
)
 
(18,575
)
AHP subsidy for AHP advance disbursements
(1,416
)
 
(1,378
)
Return of previously disbursed grants and subsidies
14

 
102

Balance at end of period
$
78,344

 
$
81,627



Note 15 — Capital

We are subject to capital requirements under our capital plan, the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act), and FHFA regulations:
 

30
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


1.
Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement.
 
2.
Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses. We have never issued Class A stock.
 
3.
Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.
 
The FHFA may require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

The following tables demonstrate our compliance with our regulatory capital requirements at June 30, 2017, and December 31, 2016 (dollars in thousands):
Risk-Based Capital Requirements
June 30,
2017
 
December 31,
2016
 
 
 
 
Permanent capital
 

 
 

Class B capital stock
$
2,408,647

 
$
2,411,306

Mandatorily redeemable capital stock
37,380

 
32,687

Retained earnings
1,245,325

 
1,216,986

Total permanent capital
$
3,691,352

 
$
3,660,979

Risk-based capital requirement
 

 
 

Credit-risk capital
$
344,501

 
$
355,182

Market-risk capital
152,177

 
118,765

Operations-risk capital
149,003

 
142,184

Total risk-based capital requirement
$
645,681

 
$
616,131

Permanent capital in excess of risk-based capital requirement
$
3,045,671

 
$
3,044,848

 
 
June 30, 2017
 
December 31, 2016
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
645,681

 
$
3,691,352

 
$
616,131

 
$
3,660,979

Total regulatory capital
 
$
2,430,170

 
$
3,691,352

 
$
2,461,823

 
$
3,660,979

Total capital-to-asset ratio
 
4.0
%
 
6.1
%
 
4.0
%
 
5.9
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
3,037,712

 
$
5,537,028

 
$
3,077,279

 
$
5,491,469

Leverage capital-to-assets ratio
 
5.0
%
 
9.1
%
 
5.0
%
 
8.9
%


Note 16 — Accumulated Other Comprehensive Loss

The following table presents a summary of changes in accumulated other comprehensive loss for the three and six months ended June 30, 2017 and 2016 (dollars in thousands):

31
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, March 31, 2016
 
$
(85,888
)
 
$
(219,739
)
 
$
(81,065
)
 
$
(3,738
)
 
$
(390,430
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
27,941

 
—

 
(9,731
)
 
—

 
18,210

Noncredit other-than-temporary impairment losses
 
—

 
(420
)
 
—

 
—

 
(420
)
Accretion of noncredit loss
 
—

 
9,211

 
—

 
—

 
9,211

Net actuarial loss
 
—

 
—

 
—

 
(2,918
)
 
(2,918
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
779

 
—

 
—

 
779

Amortization - hedging activities (2)
 
—

 
—

 
6,893

 
—

 
6,893

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
333

 
333

Other comprehensive income (loss)
 
27,941

 
9,570

 
(2,838
)
 
(2,585
)
 
32,088

Balance, June 30, 2016
 
$
(57,947
)
 
$
(210,169
)
 
$
(83,903
)
 
$
(6,323
)
 
$
(358,342
)
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2017
 
$
(109,903
)
 
$
(183,718
)
 
$
(44,006
)
 
$
(5,945
)
 
$
(343,572
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
15,594

 
—

 
(4,943
)
 
—

 
10,651

Accretion of noncredit loss
 
—

 
8,119

 
—

 
—

 
8,119

Net actuarial gain
 
—

 
—

 
—

 
224

 
224

Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
531

 
—

 
—

 
531

Amortization - hedging activities (4)
 
—

 
—

 
3,395

 
—

 
3,395

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
191

 
191

Other comprehensive income (loss)
 
15,594

 
8,650

 
(1,548
)
 
415

 
23,111

Balance, June 30, 2017
 
$
(94,309
)
 
$
(175,068
)
 
$
(45,554
)
 
$
(5,530
)
 
$
(320,461
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified to (from) accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $6.9 million recorded in CO bond interest expense and $4,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $3.4 million recorded in CO bond interest expense and $4,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.


32
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, December 31, 2015
 
$
(137,718
)
 
$
(229,785
)
 
$
(71,237
)
 
$
(3,857
)
 
$
(442,597
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
79,771

 
—

 
(26,770
)
 
—

 
53,001

Noncredit other-than-temporary impairment losses
 
—

 
(656
)
 
—

 
—

 
(656
)
Accretion of noncredit loss
 
—

 
18,352

 
—

 
—

 
18,352

Net actuarial loss
 
—

 
—

 
—

 
(2,917
)
 
(2,917
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
1,920

 
—

 
—

 
1,920

Amortization - hedging activities (2)
 
—

 
—

 
14,104

 
—

 
14,104

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
451

 
451

Other comprehensive income (loss)
 
79,771

 
19,616

 
(12,666
)
 
(2,466
)
 
84,255

Balance, June 30, 2016
 
$
(57,947
)
 
$
(210,169
)
 
$
(83,903
)
 
$
(6,323
)
 
$
(358,342
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
$
(136,809
)
 
$
(192,379
)
 
$
(48,187
)
 
$
(6,139
)
 
$
(383,514
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
42,500

 
—

 
(5,081
)
 
—

 
37,419

Accretion of noncredit loss
 
—

 
16,415

 
—

 
—

 
16,415

Net actuarial gain
 
—

 
—

 
—

 
224

 
224

Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
896

 
—

 
—

 
896

Amortization - hedging activities (4)
 
—

 
—

 
7,714

 
—

 
7,714

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
385

 
385

Other comprehensive income
 
42,500

 
17,311

 
2,633

 
609

 
63,053

Balance, June 30, 2017
 
$
(94,309
)
 
$
(175,068
)
 
$
(45,554
)
 
$
(5,530
)
 
$
(320,461
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified to (from) accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $14.1 million recorded in CO bond interest expense and $7,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $7.7 million recorded in CO bond interest expense and $7,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.

Note 17— Fair Values

A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Item 8 — Financial

33
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


Statements and Supplementary Data — Note 18 — Fair Values in the 2016 Annual Report. There have been no material changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the six months ended June 30, 2017.

The carrying values, fair values, and fair-value hierarchy of our financial instruments at June 30, 2017, and December 31, 2016, were as follows (dollars in thousands). These fair values do not represent an estimate of our overall market value as a going concern, which would take into account, among other things, our future business opportunities and the net profitability of our assets and liabilities.
 
June 30, 2017
 
Carrying
Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
176,852

 
$
176,852

 
$
176,852

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
279,046

 
279,046

 
279,046

 
—

 
—

 
—

Securities purchased under agreements to resell
4,349,000

 
4,348,852

 
—

 
4,348,852

 
—

 
—

Federal funds sold
4,460,000

 
4,459,941

 
—

 
4,459,941

 
—

 
—

Trading securities(1)
514,313

 
514,313

 
—

 
514,313

 
—

 
—

Available-for-sale securities(1)
6,641,796

 
6,641,796

 
—

 
6,626,382

 
15,414

 
—

Held-to-maturity securities
1,898,097

 
2,160,053

 
—

 
1,011,431

 
1,148,622

 
—

Advances
38,427,616

 
38,572,842

 
—

 
38,572,842

 
—

 
—

Mortgage loans, net
3,804,581

 
3,848,195

 
—

 
3,824,845

 
23,350

 
—

Accrued interest receivable
85,997

 
85,997

 
—

 
85,997

 
—

 
—

Derivative assets(1)
56,623

 
56,623

 
—

 
42,862

 
—

 
13,761

Other assets (1)
21,703

 
21,703

 
10,336

 
11,367

 
—

 
—

Liabilities:


 
 

 
 
 
 
 
 
 
 
Deposits
(469,173
)
 
(469,169
)
 
—

 
(469,169
)
 
—

 
—

COs:


 
 
 
 
 
 
 
 
 
 
Bonds
(28,518,424
)
 
(28,645,061
)
 
—

 
(28,645,061
)
 
—

 
—

Discount notes
(27,865,529
)
 
(27,864,927
)
 
—

 
(27,864,927
)
 
—

 
—

Mandatorily redeemable capital stock
(37,380
)
 
(37,380
)
 
(37,380
)
 
—

 
—

 
—

Accrued interest payable
(84,093
)
 
(84,093
)
 
—

 
(84,093
)
 
—

 
—

Derivative liabilities(1)
(329,229
)
 
(329,229
)
 
—

 
(419,486
)
 
—

 
90,257

Other:


 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances
—

 
(4,377
)
 
—

 
(4,377
)
 
—

 
—

Standby letters of credit
(763
)
 
(763
)
 
—

 
(763
)
 
—

 
—

_______________________
(1)
Carried at fair value on a recurring basis.


34
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
December 31, 2016
 
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
520,031

 
$
520,031

 
$
520,031

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
278

 
278

 
278

 
—

 
—

 
—

Securities purchased under agreements to resell
5,999,000

 
5,998,799

 
—

 
5,998,799

 
—

 
—

Federal funds sold
2,700,000

 
2,699,949

 
—

 
2,699,949

 
—

 
—

Trading securities(1)
612,622

 
612,622

 
—

 
612,622

 
—

 
—

Available-for-sale securities(1)
6,588,664

 
6,588,664

 
—

 
6,580,518

 
8,146

 
—

Held-to-maturity securities
2,130,767

 
2,372,290

 
—

 
1,176,269

 
1,196,021

 
—

Advances
39,099,339

 
39,273,044

 
—

 
39,273,044

 
—

 
—

Mortgage loans, net
3,693,894

 
3,736,548

 
—

 
3,708,123

 
28,425

 
—

Accrued interest receivable
84,653

 
84,653

 
—

 
84,653

 
—

 
—

Derivative assets(1)
61,598

 
61,598

 
—

 
55,078

 
—

 
6,520

Other assets(1)
17,779

 
17,779

 
8,394

 
9,385

 
—

 
—

Liabilities:
 

 
 

 
 
 
 
 
 
 
 
Deposits
(482,163
)
 
(482,158
)
 
—

 
(482,158
)
 
—

 
—

COs:
 
 
 
 
 
 
 
 
 
 
 
Bonds
(27,171,434
)
 
(27,298,499
)
 
—

 
(27,298,499
)
 
—

 
—

Discount notes
(30,053,964
)
 
(30,054,085
)
 
—

 
(30,054,085
)
 
—

 
—

Mandatorily redeemable capital stock
(32,687
)
 
(32,687
)
 
(32,687
)
 
—

 
—

 
—

Accrued interest payable
(80,822
)
 
(80,822
)
 
—

 
(80,822
)
 
—

 
—

Derivative liabilities(1)
(357,876
)
 
(357,876
)
 
—

 
(460,287
)
 
—

 
102,411

Other:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances
—

 
(4,412
)
 
—

 
(4,412
)
 
—

 
—

Standby letters of credit
(1,064
)
 
(1,064
)
 
—

 
(1,064
)
 
—

 
—


_______________________
(1)
Carried at fair value on a recurring basis.

Fair Value Measured on a Recurring Basis.

The following tables present our assets and liabilities that are measured at fair value on the statement of condition, which are recorded on a recurring basis at June 30, 2017, and December 31, 2016, by fair-value hierarchy level (dollars in thousands):


35
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
—

 
$
309,332

 
$
—

 
$
—

 
$
309,332

U.S. government-guaranteed – single-family MBS
—

 
7,634

 
—

 
—

 
7,634

GSEs – single-family MBS
—

 
534

 
—

 
—

 
534

GSEs – multifamily MBS
—

 
196,813

 
—

 
—

 
196,813

Total trading securities
—

 
514,313

 
—

 
—

 
514,313

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

State or local HFA securities
—

 
—

 
15,414

 
—

 
15,414

Supranational institutions
—

 
422,178

 
—

 
—

 
422,178

U.S. government-owned corporations
—

 
285,772

 
—

 
—

 
285,772

GSEs
—

 
120,353

 
—

 
—

 
120,353

U.S. government guaranteed – single-family MBS
—

 
110,447

 
—

 
—

 
110,447

U.S. government guaranteed – multifamily MBS
—

 
491,237

 
—

 
—

 
491,237

GSEs – single-family MBS
—

 
4,148,697

 
—

 
—

 
4,148,697

GSEs – multifamily MBS
—

 
1,047,698

 
—

 
—

 
1,047,698

Total available-for-sale securities
—

 
6,626,382

 
15,414

 
—

 
6,641,796

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
—

 
42,763

 
—

 
13,761

 
56,524

Mortgage delivery commitments
—

 
99

 
—

 
—

 
99

Total derivative assets
—

 
42,862

 
—

 
13,761

 
56,623

Other assets
10,336

 
11,367

 
—

 
—

 
21,703

Total assets at fair value
$
10,336

 
$
7,194,924

 
$
15,414

 
$
13,761

 
$
7,234,435

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$
—

 
$
(419,289
)
 
$
—

 
$
90,257

 
$
(329,032
)
Mortgage delivery commitments
—

 
(197
)
 
—

 
—

 
(197
)
Total liabilities at fair value
$
—

 
$
(419,486
)
 
$
—

 
$
90,257

 
$
(329,229
)
_______________________
(1)
These amounts represent the application of the netting requirements which 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.


36
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
—

 
$
399,521

 
$
—

 
$
—

 
$
399,521

U.S. government-guaranteed – single-family MBS
—

 
8,494

 
—

 
—

 
8,494

GSEs – single-family MBS
—

 
768

 
—

 
—

 
768

GSEs – multifamily MBS
—

 
203,839

 
—

 
—

 
203,839

Total trading securities
—

 
612,622

 
—

 
—

 
612,622

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

State or local HFA securities
—

 
—

 
8,146

 
—

 
8,146

Supranational institutions
—

 
422,620

 
—

 
—

 
422,620

U.S. government-owned corporations
—

 
271,957

 
—

 
—

 
271,957

GSEs
—

 
117,468

 
—

 
—

 
117,468

U.S. government guaranteed – single-family MBS
—

 
124,727

 
—

 
—

 
124,727

U.S. government guaranteed – multifamily MBS
—

 
563,361

 
—

 
—

 
563,361

GSEs – single-family MBS
—

 
4,403,855

 
—

 
—

 
4,403,855

GSEs – multifamily MBS
—

 
676,530

 
—

 
—

 
676,530

Total available-for-sale securities
—

 
6,580,518

 
8,146

 
—

 
6,588,664

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
—

 
55,008

 
—

 
6,520

 
61,528

Mortgage delivery commitments
—

 
70

 
—

 
—

 
70

Total derivative assets
—

 
55,078

 
—

 
6,520

 
61,598

Other assets
8,394

 
9,385

 
—

 
—

 
17,779

Total assets at fair value
$
8,394

 
$
7,257,603

 
$
8,146

 
$
6,520

 
$
7,280,663

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$
—

 
$
(460,116
)
 
$
—

 
$
102,411

 
$
(357,705
)
Mortgage delivery commitments
—

 
(171
)
 
—

 
—

 
(171
)
Total liabilities at fair value
$
—

 
$
(460,287
)
 
$
—

 
$
102,411

 
$
(357,876
)
_______________________
(1)
These amounts represent the application of the netting requirements which 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.

The following table presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) during the three and six months ended June 30, 2017. There were no Level 3 available-for-sale securities during the six months ended June 30, 2016 (dollars in thousands).

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2017
 
June 30, 2017
Balance at beginning of period
 
$
8,184

 
$
8,146

Purchases
 
7,600

 
7,600

Unrealized losses included in other comprehensive income
 
(370
)
 
(332
)
Balance at end of period
 
$
15,414

 
$
15,414




37
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


Fair Value on a Nonrecurring Basis

We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and real-estate-owned property (REO) at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security).

The following tables present financial assets by level within the fair-value hierarchy which were recorded at fair value on a nonrecurring basis. The fair values presented are as of the date the fair value adjustment was recorded (dollars in thousands).

 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$
—

 
$
—

 
$
2,077

 
$
2,077

Mortgage loans held for portfolio
—

 
—

 
4,745

 
4,745

REO
—

 
—

 
654

 
654

 
 
 
 
 
 
 
 
Total assets recorded at fair value on a nonrecurring basis
$
—

 
$
—

 
$
7,476

 
$
7,476


 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$
—

 
$
—

 
$
8,498

 
$
8,498

Mortgage loans held for portfolio
—

 
—

 
5,618

 
5,618

REO
—

 
—

 
786

 
786

 
 
 
 
 
 
 
 
Total assets recorded at fair value on a nonrecurring basis
$
—

 
$
—

 
$
14,902

 
$
14,902



Note 18 — Commitments and Contingencies

Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of June 30, 2017, and through the filing of this report, we believe there is a remote likelihood that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by the FHLBank Act, as implemented by FHFA regulations, and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at June 30, 2017, and December 31, 2016. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $955.2 billion and $932.1 billion at June 30, 2017, and December 31, 2016, respectively. See Note 13 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments

38
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 



The following table sets forth our off-balance-sheet commitments as of June 30, 2017, and December 31, 2016 (dollars in thousands):

 
 
June 30, 2017
 
December 31, 2016
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
4,042,006

 
$
205,432

 
$
4,247,438

 
$
4,050,447

 
$
179,632

 
$
4,230,079

Commitments for unused lines of credit - advances (2)
 
1,274,172

 
—

 
1,274,172

 
1,255,140

 
—

 
1,255,140

Commitments to make additional advances
 
151,874

 
54,241

 
206,115

 
44,865

 
65,972

 
110,837

Commitments to invest in mortgage loans
 
71,314

 
—

 
71,314

 
22,524

 
—

 
22,524

Unsettled CO bonds, at par
 
107,745

 
—

 
107,745

 
—

 
—

 
—

__________________________
(1)
The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At June 30, 2017, and December 31, 2016, these amounts totaled $7.3 million and $2.7 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $285,000 at December 31, 2016.
(2)
Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements.

Standby Letters of Credit. A standby letter of credit is a financing arrangement pursuant to which we agree for a fee to fund the associated obligation to a third-party beneficiary should the primary obligor fail to fund such obligation. 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. The original terms of these standby letters of credit have original expiration periods of up to 20 years, currently expiring no later than 2026. Our unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $763,000 and $1.1 million at June 30, 2017, and December 31, 2016, respectively.

Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.

Pledged Collateral. We have pledged securities, as collateral, related to derivatives. See Note 11 — 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 19 — Transactions with Shareholders

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. The following tables present transactions with shareholders whose holdings of capital stock exceed 10 percent or more of total capital stock outstanding at June 30, 2017, and December 31, 2016 (dollars in thousands):


39
FEDERAL HOME LOAN BANK OF BOSTON
 
 
NOTES TO FINANCIAL STATEMENTS
 
 
(unaudited)
 


 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
245,034

 
10.0
%
 
$
5,108,880

 
13.3
%
 
$
1,661

 
4.4
%
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
357,508

 
14.6
%
 
$
7,260,446

 
18.6
%
 
$
2,625

 
7.3
%


We held sufficient collateral to support the advances to the above institution such that we do not expect to incur any credit losses on these advances.

We recognized interest income on outstanding advances and fees on letters of credit from Citizens Bank, N.A. during the three and six months ended June 30, 2017 and 2016, as follows (dollars in thousands):
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Citizens Bank, N.A.
 
2017
 
2016
 
2017
 
2016
Interest income on advances
 
$
18,541

 
$
8,082

 
$
32,652

 
$
16,286

Fees on letters of credit
 
701

 
779

 
1,446

 
1,619



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.

The following table presents the outstanding balances of capital stock, advances, and accrued interest receivable with members whose officers or directors serve on our board of directors, and those balances as a percentage of our total balance as reported on our statement of condition (dollars in thousands):
 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of June 30, 2017
$
78,430

 
3.2
%
 
$
1,416,338

 
3.7
%
 
$
1,541

 
4.1
%
As of December 31, 2016
91,374

 
3.7

 
1,554,753

 
4.0

 
1,631

 
4.5



Note 20 — Subsequent Events

On July 21, 2017, the board of directors declared a cash dividend at an annualized rate of 4.22 percent based on capital stock balances outstanding during the second quarter of 2017. The dividend, including dividends on mandatorily redeemable capital stock, amounted to $26.0 million and was paid on August 2, 2017.
 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Index to Management's Discussion and Analysis of Financial Condition and Results of Operations

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Forward-Looking Statements
 
This report includes statements describing anticipated developments, projections, estimates, or future predictions of ours that are “forward-looking statements.” These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors in the 2016 Annual Report and Part II — Item 1A — Risk Factors of this quarterly report and the risks set forth below. Accordingly, we caution that actual results could differ materially from those expressed or implied in these forward-looking statements or could impact the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.
 
Forward-looking statements in this report may include, among others, our expectations for:

•
income, retained earnings, and dividend payouts;
•
repurchases of stock in excess of a shareholder’s total stock investment requirement (excess stock);
•
credit losses on advances and investments in mortgage loans and ABS, particularly private-label MBS;
•
balance-sheet changes and components thereof, such as changes in advances balances and the size of our portfolio of investments in mortgage loans;
•
our minimum retained earnings target; and
•
the interest-rate environment in which we do business.

Actual results may differ from forward-looking statements for many reasons, including, but not limited to:
 
•
changes in interest rates, the rate of inflation (or deflation), housing prices, employment rates, and the general economy, including changes resulting from changes in U.S. fiscal policy or ratings of the U.S. federal government;
•
changes in demand for our advances and other products;
•
the willingness of our members to do business with us;
•
changes in the financial health of our members;
•
changes in borrower defaults on mortgage loans;
•
changes in the credit performance and loss severities of our investments;
•
changes in prepayment rates on advances and investments;
•
the value of collateral we hold as security for obligations of our members and counterparties;
•
issues and events across the FHLBank System and in the political arena that may lead to executive branch, legislative, regulatory, judicial, or other developments impacting the scope of our business, demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, the manner in which we operate, or the organization and structure of the FHLBank System;
•
competitive forces including, without limitation, other sources of funding available to our members, other entities borrowing funds in the capital markets, and our ability to attract and retain skilled employees;
•
the pace of technological change and our ability to develop and support technology and information systems sufficient to manage the risks of our business effectively;
•
the loss of members due to, among other ways, member withdrawals, mergers and acquisitions;
•
changes in investor demand for COs;
•
changes in the terms or availability of derivatives and other agreements we enter into in support of our business operations;
•
the timing and volume of market activity;
•
the volatility of reported results due to changes in the fair value of certain assets and liabilities, including, but not limited to, private-label MBS;
•
our ability to introduce new (or adequately adapt current) products and services and successfully manage the risks associated with our products and services, including new types of collateral used to secure advances;
•
losses arising from litigation filed against us or one or more of the other FHLBanks;
•
gains resulting from legal claims we have;

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•
losses arising from our joint and several liability on COs;
•
significant business disruptions resulting from vendor or third-party failure, natural or other disasters, cyberincidents, acts of war, or terrorism; and
•
new accounting standards.

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2016 Annual Report.

EXECUTIVE SUMMARY

For the three months ended June 30, 2017, net income decreased to $39.4 million, from $47.5 million for the three months ended June 30, 2016. The decrease was primarily due to litigation settlement income of $19.6 million in the second quarter of 2016, while there was not litigation settlement income in the second quarter of 2017. The reduction in litigation settlement income was partially offset by an increase of $9.3 million in net interest income after provision for credit losses, and a $2.5 million reduction in losses on derivatives and hedging activities. Our return on average equity was 4.74 percent for the three months ended June 30, 2017, compared with 6.09 percent for the three months ended June 30, 2016, a decrease of 135 basis points. Our financial condition continued to strengthen with retained earnings of $1.2 billion at June 30, 2017, a surplus of $545.3 million over our minimum retained earnings target, as we continued to satisfy all regulatory capital requirements as of June 30, 2017.

On July 21, 2017, our board of directors declared a cash dividend that was equivalent to an annual yield of 4.22 percent, the approximate daily average three-month London Interbank Offered Rate (LIBOR) yield for the second quarter of 2017 plus 300 basis points.

Net Interest Margin

For the three months ended June 30, 2017, net interest margin was 0.43 percent, an increase of six basis points from the three months ended June 30, 2016. Net interest margin benefited from improvement in net interest spread and modest increase in interest rates.

Advances Balances

We continue to deliver on our primary mission, supplying liquidity and funding to our members, with advances balances of $38.4 billion at June 30, 2017, down from $39.1 billion at December 31, 2016, but up from $35.5 billion at March 31, 2017. The fluctuation was led by, but not confined to, the Bank's largest borrowing members with variable-rate indexed advances and fixed-rate putable advances, most significantly represented. We cannot predict whether this trend will continue.

Accretable yields from investments in private-label MBS

For the three months ended June 30, 2017 and 2016, we recognized $8.5 million and $9.9 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition in the 2016 Annual Report.

The amortized cost of our total investments in private-label MBS and ABS backed by home-equity loans has declined to $926.4 million at June 30, 2017. Other-than-temporary impairment credit losses were $568,000 for the three months ended June 30, 2017.

Repurchases of Excess Stock

In April 2017, under the excess stock management program adopted by our board of directors on July 24, 2015, we conducted a partial repurchase of excess stock from shareholders. On May 1, 2017, we announced that at close of business on May 31, 2017, we would reduce the activity-based stock investment requirement (ABSIR) for certain advances and on June 1, 2017, we would initiate daily repurchases of excess stock. For additional information see below under Liquidity and Capital Resources — Internal Capital Practices and Policies. Excess stock repurchases for the three months ended June 30, 2017 amounted to $383.2 million.


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Regulatory Developments

The FHFA has issued or proposed regulations as described in — Legislative and Regulatory Developments. Such developments affect the way we conduct business and could impact the way we satisfy our mission as well as the value of our membership. Executive branch efforts at regulatory reform may affect the development or implementation of new regulations affecting us.

ECONOMIC CONDITIONS

Economic Environment

In the second quarter of 2017, the U.S. labor market continued to strengthen, and economic activity continued to expand at a moderate pace. Job gains were strong at over 190,000 jobs added per month from April through June. The June unemployment rate was 4.4 percent, a slight decline from 4.5 percent in March. Household spending and business investment rose moderately. Inflation continued to be muted, running slightly below 2 percent during the period reported.

Interest-Rate Environment

On June 14, 2017, the Federal Open Market Committee (FOMC) announced that it had decided to increase the target range for the federal funds rate to 1 percent to 1.25 percent. Following the announcement, long-term Treasury yields increased slightly. The FOMC stated that if current economic expectations materialize, it would begin implementing a “balance sheet normalization program” in 2017 by reducing the reinvestment of principal payments from maturing securities. On July 26, 2017, the FOMC left the target range for the federal funds rate unchanged.

The following chart illustrates the interest-rate environment.

 
Three Month Average
 
Six Month Average
 
Ending rate
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
December 31, 2016
Federal funds effective rate
0.95%
 
0.37%
 
0.83%
 
0.37%
 
1.06%
 
0.55%
3-month LIBOR
1.21%
 
0.64%
 
1.14%
 
0.63%
 
1.30%
 
1.00%
3-month U.S. Treasury yield
0.90%
 
0.25%
 
0.75%
 
0.26%
 
1.01%
 
0.50%
2-year U.S. Treasury yield
1.29%
 
0.77%
 
1.26%
 
0.80%
 
1.38%
 
1.19%
5-year U.S. Treasury yield
1.80%
 
1.24%
 
1.87%
 
1.30%
 
1.89%
 
1.93%
10-year U.S. Treasury yield
2.26%
 
1.75%
 
2.35%
 
1.82%
 
2.30%
 
2.44%
________________
Source: Bloomberg

SELECTED FINANCIAL DATA

The following financial highlights for the statement of condition for December 31, 2016, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements.




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SELECTED FINANCIAL DATA
STATEMENT OF CONDITION
 (dollars in thousands)
 
 
 
 
 
June 30, 2017
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
Statement of Condition
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
60,754,247

 
$
56,568,802

 
$
61,545,586

 
$
60,543,301

 
$
62,160,154

Investments(1)
 
18,142,252

 
17,215,779

 
18,031,331

 
19,264,484

 
19,676,487

Advances
 
38,427,616

 
35,479,424

 
39,099,339

 
37,195,148

 
38,241,920

Mortgage loans held for portfolio, net(2)
 
3,804,581

 
3,675,598

 
3,693,894

 
3,714,283

 
3,628,464

Deposits and other borrowings
 
469,173

 
490,268

 
482,163

 
610,783

 
634,995

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
    Bonds
 
28,518,424

 
27,978,423

 
27,171,434

 
27,345,898

 
27,139,771

    Discount notes
 
27,865,529

 
24,179,050

 
30,053,964

 
28,725,374

 
30,483,963

    Total consolidated obligations
 
56,383,953

 
52,157,473

 
57,225,398

 
56,071,272

 
57,623,734

Mandatorily redeemable capital stock
 
37,380

 
32,677

 
32,687

 
33,812

 
35,076

Class B capital stock outstanding-putable(3)
 
2,408,647

 
2,458,667

 
2,411,306

 
2,333,262

 
2,353,698

Unrestricted retained earnings
 
1,000,694

 
994,011

 
987,711

 
962,798

 
955,126

Restricted retained earnings
 
244,631

 
236,755

 
229,275

 
217,343

 
210,031

Total retained earnings
 
1,245,325

 
1,230,766

 
1,216,986

 
1,180,141

 
1,165,157

Accumulated other comprehensive loss
 
(320,461
)
 
(343,572
)
 
(383,514
)
 
(360,644
)
 
(358,342
)
Total capital
 
3,333,511

 
3,345,861

 
3,244,778

 
3,152,759

 
3,160,513

Other Information
 
 
 
 
 
 
 
 
 
 
Total regulatory capital ratio(4)
 
6.08
%
 
6.58
%
 
5.95
%
 
5.86
%
 
5.72
%
_______________________
(1)
Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.
(2)
The allowance for credit losses amounted to $500,000, $625,000, $650,000, $800,000, and $900,000, for the quarters ended June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, respectively.
(3)
Capital stock is putable at the option of a member, subject to applicable restrictions.
(4)
Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 1 — Notes to Financial Statements — Note 15 — Capital.


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SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS AND OTHER INFORMATION
 (dollars in thousands)
 
 
 
 
 
Results of Operations for the Three Months Ended
 
 
June 30, 2017
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
Net interest income
 
$
63,820

 
$
62,504

 
$
76,287

 
$
64,779

 
$
54,579

Reduction of provision for credit losses
 
(125
)
 
(51
)
 
(83
)
 
(94
)
 
(111
)
Net impairment losses on held-to-maturity securities recognized in earnings
 
(568
)
 
(418
)
 
(589
)
 
(371
)
 
(1,003
)
Litigation settlements
 
—

 
—

 
19,627

 
—

 
19,584

Other income (loss)
 
1,020

 
427

 
1,272

 
(3,072
)
 
(1,787
)
Other expense
 
20,597

 
20,974

 
30,351

 
20,773

 
18,688

AHP assessments
 
4,418

 
4,192

 
6,666

 
4,099

 
5,312

Net income
 
$
39,382

 
$
37,398

 
$
59,663

 
$
36,558

 
$
47,484

Other Information
 
 
 
 
 
 
 
 
 
 
Dividends declared
 
$
24,822

 
$
23,619

 
$
22,818

 
$
21,574

 
$
21,148

Dividend payout ratio
 
63.03
%
 
63.16
%
 
38.24
%
 
59.01
%
 
44.54
%
Weighted-average dividend rate(1)
 
4.08

 
3.94

 
3.80

 
3.65

 
3.63

Return on average equity(2)
 
4.74

 
4.56

 
7.38

 
4.55

 
6.09

Return on average assets
 
0.26

 
0.25

 
0.40

 
0.25

 
0.32

Net interest margin(3)
 
0.43

 
0.43

 
0.51

 
0.45

 
0.37

Average equity to average assets
 
5.56

 
5.55

 
5.39

 
5.48

 
5.31

_______________________
(1)
Weighted-average dividend rate is the dividend amount declared divided by the average daily balance of capital stock eligible for dividends during the preceding quarter.
(2)
Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive loss, and total retained earnings.
(3)
Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.

RESULTS OF OPERATIONS

Net Income

Second Quarter of 2017 Compared with Second Quarter of 2016

Net income decreased to $39.4 million for the three months ended June 30, 2017, from $47.5 million for the three months ended June 30, 2016. The reasons for the decrease are discussed above within — Executive Summary.

Six Months Ended June 30, 2017, Compared with Six Months Ended June 30, 2016

Net income decreased slightly to $76.8 million for the six months ended June 30, 2017, from $77.0 million for the six months ended June 30, 2016, as a $19.6 million decrease in litigation settlement income was essentially offset by a $15.7 million increase in net interest income after provision for credit losses.

Net Interest Income

Second Quarter of 2017 Compared with Second Quarter of 2016

Net interest income after provision for credit losses for the three months ended June 30, 2017 was $63.9 million, compared with $54.7 million for the same period in 2016. The $9.3 million increase in net interest income after provision for credit losses was primarily attributable to a six basis point increase in net interest margin and a $1.0 billion increase in average earning assets, from $58.6 billion for the three months ended June 30, 2016, to $59.6 billion for the three months ended June 30, 2017.

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The increase in average earning assets was driven by a $2.4 billion increase in average advances balances partially offset by a $1.5 billion decrease in average investments balances. For additional information see — Executive Summary as well as Rate and Volume Analysis.

Net interest spread was 0.36 percent for the six months ended June 30, 2017, a three basis point increase from the same period in 2016, and net interest margin was 0.43 percent, a six basis point increase from the same period in 2016. The increase in net interest spread reflects a 36 basis point increase in the average yield on earning assets and a 33 basis point increase in the average yield on interest-bearing liabilities. The increase in net interest margin benefited from net interest spread expansion and higher interest rates.

Six Months Ended June 30, 2017, Compared with Six Months Ended June 30, 2016

Net interest income after provision for credit losses for the six months ended June 30, 2017 was $126.5 million, compared with $110.8 million for the same period in 2016. The $15.7 million increase in net interest income after provision for credit losses was primarily attributable to a five basis point increase in net interest margin and a $1.0 billion increase in average earning assets, from $58.6 billion for the six months ended June 30, 2016, to $59.6 billion for the six months ended June 30, 2017. The increase in average earning assets was driven by a $2.4 billion increase in average advances balances partially offset by a $1.6 billion decrease in average investments balances. For additional information see — Rate and Volume Analysis. Partially offsetting the increase to net interest income after provision for credit losses was a $2.9 million decrease in net prepayment fees from advances and investments from $3.3 million in the six months ended June 30, 2016, to $375,000 in the six months ended June 30, 2017.

Net interest spread was 0.36 percent for the six months ended June 30, 2017, a three basis point increase from the same period in 2016, and net interest margin was 0.43 percent, a five basis point increase from the same period in 2016. The increase in net interest spread reflects a 27 basis point increase in the average yield on earning assets and a 24 basis point increase in the average yield on interest-bearing liabilities. The increase in net interest margin benefited from net interest spread expansion and higher interest rates.

The following table presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.


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Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Three Months Ended June 30,
 
 
2017
 
2016
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
38,458,219

 
$
127,866

 
1.33
%
 
$
36,073,581

 
$
81,874

 
0.91
%
Securities purchased under agreements to resell
 
2,980,868

 
6,330

 
0.85

 
3,375,374

 
2,713

 
0.32

Federal funds sold
 
5,334,418

 
12,708

 
0.96

 
5,578,077

 
5,176

 
0.37

Investment securities(2)
 
8,833,164

 
45,666

 
2.07

 
9,843,307

 
47,599

 
1.94

Mortgage loans
 
3,732,839

 
30,989

 
3.33

 
3,588,569

 
29,906

 
3.35

Other earning assets
 
286,295

 
668

 
0.94

 
187,115

 
136

 
0.29

Total interest-earning assets
 
59,625,803

 
224,227

 
1.51

 
58,646,023

 
167,404

 
1.15

Other non-interest-earning assets
 
308,627

 
 
 
 
 
305,961

 
 
 
 
Fair-value adjustments on investment securities
 
(20,148
)
 
 
 
 
 
21,935

 
 
 
 
Total assets
 
$
59,914,282

 
$
224,227

 
1.50
%
 
$
58,973,919

 
$
167,404

 
1.14
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
26,792,665

 
$
55,068

 
0.82
%
 
$
26,396,173

 
$
22,579

 
0.34
%
Bonds
 
28,623,491

 
104,168

 
1.46

 
28,101,663

 
89,780

 
1.28

Deposits
 
451,950

 
788

 
0.70

 
489,348

 
146

 
0.12

Mandatorily redeemable capital stock
 
35,847

 
377

 
4.22

 
35,242

 
319

 
3.65

Other borrowings
 
2,198

 
6

 
1.09

 
689

 
1

 
0.58

Total interest-bearing liabilities
 
55,906,151

 
160,407

 
1.15

 
55,023,115

 
112,825

 
0.82

Other non-interest-bearing liabilities
 
676,562

 
 
 
 
 
817,129

 
 
 
 
Total capital
 
3,331,569

 
 
 
 
 
3,133,675

 
 
 
 
Total liabilities and capital
 
$
59,914,282

 
$
160,407

 
1.07
%
 
$
58,973,919

 
$
112,825

 
0.77
%
Net interest income
 
 

 
$
63,820

 
 
 
 

 
$
54,579

 
 
Net interest spread
 
 

 
 

 
0.36
%
 
 

 
 

 
0.33
%
Net interest margin
 
 

 
 

 
0.43
%
 
 

 
 

 
0.37
%
_________________________
(1)
Yields are annualized
(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.



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Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
38,107,973

 
$
234,613

 
1.24
%
 
$
35,678,693

 
$
162,162

 
0.91
%
Securities purchased under agreements to resell
 
3,023,033

 
10,748

 
0.72

 
3,696,440

 
5,906

 
0.32

Federal funds sold
 
5,604,210

 
22,992

 
0.83

 
5,924,165

 
10,792

 
0.37

Investment securities(2)
 
8,993,394

 
93,302

 
2.09

 
9,569,822

 
97,475

 
2.05

Mortgage loans
 
3,703,169

 
60,936

 
3.32

 
3,583,199

 
60,982

 
3.42

Other earning assets
 
180,047

 
727

 
0.81

 
173,649

 
243

 
0.28

Total interest-earning assets
 
59,611,826

 
423,318

 
1.43

 
58,625,968

 
337,560

 
1.16

Other non-interest-earning assets
 
355,773

 
 
 
 
 
310,031

 
 
 
 
Fair-value adjustments on investment securities
 
(38,191
)
 
 
 
 
 
(469
)
 
 
 
 
Total assets
 
$
59,929,408

 
$
423,318

 
1.42
%
 
$
58,935,530

 
$
337,560

 
1.15
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
27,234,771

 
$
92,647

 
0.69
%
 
$
27,135,126

 
$
45,276

 
0.34
%
Bonds
 
28,195,706

 
202,343

 
1.45

 
27,368,472

 
180,640

 
1.33

Deposits
 
451,925

 
1,290

 
0.58

 
484,440

 
261

 
0.11

Mandatorily redeemable capital stock
 
34,274

 
706

 
4.15

 
38,576

 
698

 
3.64

Other borrowings
 
1,658

 
8

 
0.97

 
961

 
2

 
0.42

Total interest-bearing liabilities
 
55,918,334

 
296,994

 
1.07

 
55,027,575

 
226,877

 
0.83

Other non-interest-bearing liabilities
 
682,439

 
 
 
 
 
810,976

 
 
 
 
Total capital
 
3,328,635

 
 
 
 
 
3,096,979

 
 
 
 
Total liabilities and capital
 
$
59,929,408

 
$
296,994

 
1.00
%
 
$
58,935,530

 
$
226,877

 
0.77
%
Net interest income
 
 

 
$
126,324

 
 
 
 

 
$
110,683

 
 
Net interest spread
 
 

 
 

 
0.36
%
 
 

 
 

 
0.33
%
Net interest margin
 
 

 
 

 
0.43
%
 
 

 
 

 
0.38
%
_________________________
(1)
Yields are annualized
(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense for the three and six months ended June 30, 2017 and 2016. 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.
 

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Rate and Volume Analysis
(dollars in thousands)
 
 
 
For the Three Months Ended
 June 30, 2017 vs. 2016
 
For the Six Months Ended
 June 30, 2017 vs. 2016
 
 
Increase (Decrease) due to
 
Increase (Decrease) due to
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 

 
 

 
 

Advances
 
$
5,726

 
$
40,266

 
$
45,992

 
$
11,673

 
$
60,778

 
$
72,451

Securities purchased under agreements to resell
 
(352
)
 
3,969

 
3,617

 
(1,247
)
 
6,089

 
4,842

Federal funds sold
 
(236
)
 
7,768

 
7,532

 
(613
)
 
12,813

 
12,200

Investment securities
 
(5,086
)
 
3,153

 
(1,933
)
 
(5,955
)
 
1,782

 
(4,173
)
Mortgage loans
 
1,198

 
(115
)
 
1,083

 
2,008

 
(2,054
)
 
(46
)
Other earning assets
 
103

 
429

 
532

 
9

 
475

 
484

Total interest income
 
1,353

 
55,470

 
56,823

 
5,875

 
79,883

 
85,758

Interest expense
 
 
 
 
 
 
 
 

 
 

 
 

Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
344

 
32,145

 
32,489

 
167

 
47,204

 
47,371

Bonds
 
1,694

 
12,694

 
14,388

 
5,583

 
16,120

 
21,703

Deposits
 
(12
)
 
654

 
642

 
(19
)
 
1,048

 
1,029

Mandatorily redeemable capital stock
 
6

 
52

 
58

 
(83
)
 
91

 
8

Other borrowings
 
4

 
1

 
5

 
2

 
4

 
6

Total interest expense
 
2,036

 
45,546

 
47,582

 
5,650

 
64,467

 
70,117

Change in net interest income
 
$
(683
)
 
$
9,924

 
$
9,241

 
$
225

 
$
15,416

 
$
15,641


Average Balance of Advances Outstanding

The average balance of total advances increased $2.4 billion, or 6.81 percent, for the six months ended June 30, 2017, compared with the same period in 2016. However, advances balances declined by $671.7 million over the six month period ended June 30, 2017. We cannot predict whether this trend will continue. The following table summarizes average balances of advances outstanding during the six months ended June 30, 2017 and 2016, by product type.


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Average Balance of Advances Outstanding by Product Type
(dollars in thousands)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Fixed-rate advances—par value
 
 
 
 
 
 
 
 
Long-term
 
$
13,718,490

 
$
13,329,395

 
$
13,600,751

 
$
13,474,678

Short-term
 
12,325,867

 
11,676,960

 
12,040,906

 
11,282,580

Putable
 
2,356,009

 
2,190,216

 
2,432,476

 
2,084,840

Overnight
 
1,477,007

 
770,207

 
1,456,265

 
850,687

Amortizing
 
902,767

 
859,974

 
880,475

 
866,455

All other fixed-rate advances
 
48,791

 
81,604

 
47,569

 
89,110

 
 
30,828,931

 
28,908,356

 
30,458,442

 
28,648,350

 
 
 
 
 
 
 
 
 
Variable-rate indexed advances—par value
 
 
 
 
 
 
 
 
Simple variable (1)
 
7,133,989

 
6,441,292

 
7,159,936

 
6,415,141

Putable
 
477,962

 
531,780

 
470,961

 
417,676

All other variable-rate indexed advances
 
43,175

 
36,694

 
42,963

 
40,110

 
 
7,655,126

 
7,009,766

 
7,673,860

 
6,872,927

Total average par value
 
38,484,057

 
35,918,122

 
38,132,302

 
35,521,277

Net (discounts) premiums
 
(8,457
)
 
3,967

 
(6,556
)
 
4,959

Market value of bifurcated derivatives
 
629

 
3,053

 
211

 
3,118

Hedging adjustments
 
(18,010
)
 
148,439

 
(17,984
)
 
149,339

Total average balance of advances
 
$
38,458,219

 
$
36,073,581

 
$
38,107,973

 
$
35,678,693

_____________________
(1)
Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

In addition, the average balance of fixed-rate advances that were hedged with interest-rate swaps to yield an effective floating rate totaled $9.2 billion for the six months ended June 30, 2017. Therefore, a significant portion of our advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. The average balance of all such advances totaled $30.3 billion for the six months ended June 30, 2017, representing 79.6 percent of the total average balance of advances outstanding during the six months ended June 30, 2017. The average balance of all such advances totaled $27.8 billion for the six months ended June 30, 2016, representing 77.9 percent of the total average balance of advances outstanding during the six months ended June 30, 2016.

For the six months ended June 30, 2017 and 2016, net prepayment fees on advances and investments were $375,000 and $3.3 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances.

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 $987.0 million, or 10.08 percent, for the six months ended June 30, 2017, compared with the same period in 2016. 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 increase of the target range for the federal funds rate, average yields on overnight federal funds sold increased from 0.37 percent during the six months ended June 30, 2016 to 0.83 percent during the six months ended June 30, 2017, while average yields on securities purchased under agreements to resell increased from 0.32 percent for the six months ended June 30, 2016 to 0.72 percent for the six months ended June 30, 2017. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. For the six months ended June 30, 2017, average balances of securities purchased under agreements to resell decreased $673.4 million and average balances of federal funds sold decreased $320.0 million in comparison to the six months ended June 30, 2016.

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Average investment-securities balances decreased $576.4 million, or 6.02 percent, for the six months ended June 30, 2017, compared with the same period in 2016, a decrease consisting primarily of a $935.4 million decrease in MBS and a $358.3 million increase in U.S. Treasury obligations.

Average Balance of COs

Average CO balances increased $926.9 million, or 1.7 percent, for the six months ended June 30, 2017, compared with the same period in 2016, resulting from our increased funding needs principally due to the increase in our average advances balances. This overall increase consisted of an increase of $827.2 million in CO bonds and a increase of $99.6 million in CO discount notes.

The average balance of CO discount notes represented approximately 49.1 percent of total average COs during the six months ended June 30, 2017, compared with 49.8 percent of total average COs during the six months ended June 30, 2016. The average balance of CO bonds represented 50.9 percent and 50.2 percent of total average COs outstanding during the six months ended June 30, 2017 and 2016, respectively.

Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, deposits, and debt instruments that qualify for hedge accounting. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy. The following tables show the net effect of derivatives and hedging activities on net interest income, net gains (losses) on derivatives and hedging activities, and net unrealized gains (losses) on trading securities for the three and six months ended June 30, 2017 and 2016 (dollars in thousands).

 
 
For the Three Months Ended June 30, 2017
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(486
)
 
$
—

 
$
(82
)
 
$
350

 
$
—

 
$
(218
)
 
Net interest settlements included in net interest income (2)
 
(8,283
)
 
(8,099
)
 
—

 
2,082

 
—

 
(14,300
)
 
Total net interest income
 
(8,769
)
 
(8,099
)
 
(82
)
 
2,432

 
—

 
(14,518
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(773
)
 
401

 
—

 
(380
)
 
—

 
(752
)
 
Gains on cash-flow hedges
 
—

 
—

 
—

 
97

 
—

 
97

 
Losses on derivatives not receiving hedge accounting
 
(6
)
 
(369
)
 
—

 
—

 
—

 
(375
)
 
Mortgage delivery commitments
 
—

 
—

 
507

 
—

 
—

 
507

 
Other (3)
 
—

 
—

 
—

 
—

 
105

 
105

 
Net (losses) gains on derivatives and hedging activities
 
(779
)
 
32

 
507

 
(283
)
 
105

 
(418
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(9,548
)
 
(8,067
)
 
425

 
2,149

 
105

 
(14,936
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 
—

 
(852
)
 
—

 
—

 
—

 
(852
)
 
Total net effect of derivatives and hedging activities
 
$
(9,548
)
 
$
(8,919
)
 
$
425

 
$
2,149

 
$
105

 
$
(15,788
)
 
_____________________

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(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Amount in Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount, as further described in Item 1 — Notes to the Financial Statements — Note 11 — Derivatives and Hedging Activities.
 
 
For the Three Months Ended June 30, 2016
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(518
)
 
$
—

 
$
(189
)
 
$
(2,409
)
 
$
(3,116
)
 
Net interest settlements included in net interest income (2)
 
(26,128
)
 
(8,883
)
 
—

 
7,158

 
(27,853
)
 
Total net interest income
 
(26,646
)
 
(8,883
)
 
(189
)
 
4,749

 
(30,969
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (losses) gains on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(966
)
 
356

 
—

 
(1,608
)
 
(2,218
)
 
Losses on cash-flow hedges
 
—

 
—

 
—

 
(190
)
 
(190
)
 
(Losses) gains on derivatives not receiving hedge accounting
 
(85
)
 
(1,161
)
 
—

 
1

 
(1,245
)
 
Mortgage delivery commitments
 
—

 
—

 
690

 
—

 
690

 
Net (losses) gains on derivatives and hedging activities
 
(1,051
)
 
(805
)
 
690

 
(1,797
)
 
(2,963
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(27,697
)
 
(9,688
)
 
501

 
2,952

 
(33,932
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 
—

 
84

 
—

 
—

 
84

 
Total net effect of derivatives and hedging activities
 
$
(27,697
)
 
$
(9,604
)
 
$
501

 
$
2,952

 
$
(33,848
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments.
(2)
Represents interest income/expense on derivatives included in net interest income.
 

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For the Six Months Ended June 30, 2017
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,169
)
 
$
—

 
$
(163
)
 
$
247

 
$
—

 
$
(1,085
)
Net interest settlements included in net interest income (2)
 
(21,688
)
 
(16,440
)
 
—

 
6,723

 
—

 
(31,405
)
Total net interest income
 
(22,857
)
 
(16,440
)
 
(163
)
 
6,970

 
—

 
(32,490
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(131
)
 
861

 
—

 
(2,141
)
 
—

 
(1,411
)
Gains on cash-flow hedges
 
—

 
—

 
—

 
231

 
—

 
231

(Losses) gains on derivatives not receiving hedge accounting
 
(11
)
 
(215
)
 
—

 
4

 
—

 
(222
)
Mortgage delivery commitments
 
—

 
—

 
864

 
—

 
—

 
864

Other (3)
 
—

 
—

 
—

 
—

 
156

 
156

Net (losses) gains on derivatives and hedging activities
 
(142
)
 
646

 
864

 
(1,906
)
 
156

 
(382
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(22,999
)
 
(15,794
)
 
701

 
5,064

 
156

 
(32,872
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 
—

 
(2,266
)
 
—

 
—

 
—

 
(2,266
)
Total net effect of derivatives and hedging activities
 
$
(22,999
)
 
$
(18,060
)
 
$
701

 
$
5,064

 
$
156

 
$
(35,138
)
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Amount in Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount, as further described in Item 1 — Notes to the Financial Statements — Note 11 — Derivatives and Hedging Activities.


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Table of Contents


 
 
For the Six Months Ended June 30, 2016
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,349
)
 
$
—

 
$
(282
)
 
$
(4,633
)
 
$
(6,264
)
 
Net interest settlements included in net interest income (2)
 
(56,252
)
 
(17,894
)
 
—

 
15,230

 
(58,916
)
 
Total net interest income
 
(57,601
)
 
(17,894
)
 
(282
)
 
10,597

 
(65,180
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (losses) gains on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(1,189
)
 
740

 
—

 
(4,802
)
 
(5,251
)
 
Losses on cash-flow hedges
 
—

 
—

 
—

 
(536
)
 
(536
)
 
(Losses) gains on derivatives not receiving hedge accounting
 
(106
)
 
(4,652
)
 
—

 
41

 
(4,717
)
 
Mortgage delivery commitments
 
—

 
—

 
1,306

 
—

 
1,306

 
Net (losses) gains on derivatives and hedging activities
 
(1,295
)
 
(3,912
)
 
1,306

 
(5,297
)
 
(9,198
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(58,896
)
 
(21,806
)
 
1,024

 
5,300

 
(74,378
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 
—

 
1,957

 
—

 
—

 
1,957

 
Total net effect of derivatives and hedging activities
 
$
(58,896
)
 
$
(19,849
)
 
$
1,024

 
$
5,300

 
$
(72,421
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments.
(2)
Represents interest income/expense on derivatives included in net interest income.

Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) below, interest accruals on derivatives classified as economic hedges totaled a net expense of $2.5 million and $3.0 million for the six months ended June 30, 2017 and 2016, respectively.

Other Income (Loss)
 
The following table presents a summary of other income (loss) for the three and six months ended June 30, 2017 and 2016. Additionally, detail on the components of net gains (losses) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment.
 

55
Table of Contents


Other Income (Loss)
(dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
Net losses related to fair-value hedge ineffectiveness
 
$
(752
)
 
$
(2,218
)
 
$
(1,411
)
 
$
(5,251
)
Net gains (losses) related to cash-flow hedge ineffectiveness
 
97

 
(190
)
 
231

 
(536
)
Net unrealized gains (losses) related to derivatives not receiving hedge accounting associated with:
 
 
 
 
 
 
 
 
Advances
 
(5
)
 
(86
)
 
(10
)
 
(107
)
Trading securities
 
830

 
329

 
2,272

 
(1,592
)
CO Bonds
 
—

 
2

 
29

 
10

Mortgage delivery commitments
 
507

 
690

 
864

 
1,306

Net interest-accruals related to derivatives not receiving hedge accounting
 
(1,200
)
 
(1,490
)
 
(2,513
)
 
(3,028
)
Other(1)
 
105

 
—

 
156

 
—

Net losses on derivatives and hedging activities
 
(418
)
 
(2,963
)
 
(382
)
 
(9,198
)
Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income
 
(568
)
 
(1,003
)
 
(986
)
 
(2,350
)
Litigation settlements
 
—

 
19,584

 
—

 
19,584

Loss on early extinguishment of debt
 
—

 
(742
)
 
—

 
(1,300
)
Service-fee income
 
2,122

 
1,934

 
4,134

 
3,902

Net unrealized (losses) gains on trading securities
 
(852
)
 
84

 
(2,266
)
 
1,957

Other
 
168

 
(100
)
 
(39
)
 
(138
)
Total other income
 
$
452

 
$
16,794

 
$
461

 
$
12,457

______________
(1)
Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount as further described in Item 1 — Notes to the Financial Statements — Note 11 — Derivatives and Hedging Activities.

FINANCIAL CONDITION

Advances

At June 30, 2017, the advances portfolio totaled $38.4 billion, a decrease of $671.7 million compared with $39.1 billion at December 31, 2016.

The following table summarizes advances outstanding by product type at June 30, 2017, and December 31, 2016.

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Advances Outstanding by Product Type
(dollars in thousands)

 
June 30, 2017
 
December 31, 2016
 
Par Value
 
Percent of Total
 
Par Value
 
Percent of Total
Fixed-rate advances
 

 
 

 
 

 
 

Long-term
$
14,057,335

 
36.6
%
 
$
13,051,558

 
33.4
%
Short-term
13,690,463

 
35.6

 
12,260,502

 
31.3

Putable
2,126,250

 
5.5

 
2,735,050

 
7.0

Overnight
1,451,747

 
3.8

 
1,577,162

 
4.0

Amortizing
938,073

 
2.4

 
861,920

 
2.2

All other fixed-rate advances
40,000

 
0.1

 
40,000

 
0.1

 
32,303,868

 
84.0

 
30,526,192

 
78.0

 
 
 
 
 
 
 
 
Variable-rate advances
 

 
 

 
 

 
 

Simple variable (1)
5,653,175

 
14.7

 
7,895,783

 
20.2

Putable
432,000

 
1.1

 
616,000

 
1.6

All other variable-rate indexed advances
71,146

 
0.2

 
76,880

 
0.2

 
6,156,321

 
16.0

 
8,588,663

 
22.0

Total par value
$
38,460,189

 
100.0
%
 
$
39,114,855

 
100.0
%
_____________________
(1)
Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.
 
See Item 1 — Notes to the Financial Statements — Note 8 — Advances for disclosures relating to redemption terms of the advances portfolio.

At June 30, 2017, we had advances outstanding to 313, or 70.7 percent, of our 443 members. At December 31, 2016, we had advances outstanding to 315, or 70.5 percent, of our 447 members.

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 haircuts assigned based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral to secure the advance. We have never experienced a credit loss on an advance.

We assign each non-insurance company borrower to one of the following three credit status categories based primarily on our assessment of the borrower's overall financial condition and other factors:

•
Category-1: members that are generally in satisfactory financial condition;
•
Category-2: members that show weakening financial trends in key financial indices and/or regulatory findings; and
•
Category-3: members with financial weaknesses that present an elevated level of concern. We also place housing associates and non-member borrowers in Category-3.

We monitor the financial condition of our insurance company members quarterly. We lend to them based on our assessment of their financial condition and their pledge of sufficient amounts of eligible collateral.

The following table provides information regarding advances outstanding with our borrowers in Category-1, Category-2, Category-3, and insurance company members, at June 30, 2017, along with their corresponding collateral balances.


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Advances Outstanding by Borrower Credit Status Category
As of June 30, 2017
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Number of Borrowers
 
Par Value of Advances Outstanding
 
Discounted Collateral
 
Ratio of Discounted Collateral to Advances
Category-1
266

 
$
34,269,301

 
$
83,559,357

 
243.8
%
Category-2
15

 
446,331

 
909,042

 
203.7

Category-3
19

 
425,980

 
704,482

 
165.4

Insurance companies
22

 
3,318,577

 
4,077,844

 
122.9

Total
322

 
$
38,460,189

 
$
89,250,725

 
232.1
%

The method by which a borrower pledges collateral is dependent upon the category to which it is assigned and on the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are permitted to specifically list and identify single-family residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified.
Based on the financial reviews and other conditions of the members, the Bank may adjust the credit status category of a member from time to time. Due to their weaker profile, the Bank requires Category-3 members to deliver collateral to the Bank or its custodian. Based upon the method by which borrowers pledge collateral to us, the following table shows the total potential lending value of the collateral that borrowers have pledged to us, net of our collateral valuation discounts as of June 30, 2017.

Collateral by Pledge Type
(dollars in thousands)
 
Discounted Collateral
Collateral not specifically listed and identified
$
29,330,796

Collateral specifically listed and identified
54,018,039

Collateral delivered to us
12,212,568


We accept nontraditional and subprime loans that are underwritten in accordance with applicable regulatory guidance as eligible collateral for our advances as discussed under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Advances Credit Risk in the 2016 Annual Report. At June 30, 2017, and December 31, 2016, the amount of pledged nontraditional and subprime loan collateral was ten percent and nine percent, respectively, of total member discounted collateral.

We have not recorded any allowance for credit losses on advances at June 30, 2017, and December 31, 2016, for the reasons discussed in Item 1 — Notes to the Financial Statements — Note 10 — Allowance for Credit Losses.

The following table presents the top five advance-borrowing institutions at June 30, 2017, and the interest earned on outstanding advances to such institutions for the three and six months ended June 30, 2017.


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Table of Contents


Top Five Advance-Borrowing Institutions
(dollars in thousands)
 
 
June 30, 2017
 
 
 
Name
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Weighted-Average Rate (1)
 
Advances Interest Income for the
Three Months Ended June 30, 2017
Advances Interest Income for the
Six Months Ended June 30, 2017
Citizens Bank, N.A.
 
$
5,108,880

 
13.3
%
 
1.34
%
 
$
18,541

$
32,652

People's United Bank, N.A.
 
2,860,923

 
7.4

 
1.21

 
5,930

10,660

Webster Bank, N.A.
 
1,767,751

 
4.6

 
1.43

 
6,444

12,173

Berkshire Bank
 
1,337,986

 
3.5

 
1.26

 
3,478

6,152

Massachusetts Mutual Life Insurance Co.
 
1,100,000

 
2.9

 
2.14

 
6,015

11,899

Total of top five advance-borrowing institutions
 
$
12,175,540

 
31.7
%
 
 
 
$
40,408

$
73,536

_______________________
(1)
Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that we may use as hedging instruments.

Investments
 
At June 30, 2017, investment securities and short-term money-market instruments totaled $18.1 billion, an increase of $110.9 million from December 31, 2016.

Short-term money-market investments increased $388.8 million to $9.1 billion at June 30, 2017, compared with December 31, 2016. The increase was attributable to a $1.8 billion increase in federal funds sold and a $278.8 million increase in interest-bearing deposits offset by a $1.7 billion decrease in securities purchased under agreements to resell.

Investment securities declined $277.8 million to $9.1 billion at June 30, 2017, compared with December 31, 2016. The decrease was attributable to a $207.7 million decrease in MBS and a $90.2 million decrease in U.S. Treasury obligations.

Our MBS investment portfolio consists of the following categories of securities as of June 30, 2017, and December 31, 2016. The percentages in the table below are based on carrying value.

Mortgage-Backed Securities
 
June 30, 2017
 
December 31, 2016
Single-family MBS - U.S. government-guaranteed and GSE
64.0
%
 
67.5
%
Multifamily MBS - U.S. government-guaranteed and GSE
26.2

 
22.2

Private-label residential MBS
9.6

 
10.1

ABS backed by home-equity loans
0.2

 
0.2

Total MBS
100.0
%
 
100.0
%

Investments Credit Risk

We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning under one year to maturity and currently consisting only of overnight risk) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. We place short-term funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis. All of these placements currently expire within one day.

In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, whose terms to maturity are up to 35 days. We have also invested in and are subject to secured credit risk related to MBS, ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans.


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Table of Contents


We actively monitor our investments' credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, and sovereign support as well as related market signals. We endeavor to reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.

Credit ratings of our investments are provided in the following table.

Credit Ratings of Investments at Carrying Value
As of June 30, 2017
(dollars in thousands)
 
 
Long-Term Credit Rating (1)
Investment Category
 
Triple-A
 
Double-A
 
Single-A
 
Triple-B
 
Below
Triple-B
 
Unrated
Money-market instruments:
 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits
 
$
—

 
$
296

 
$
278,750

 
$
—

 
$
—

 
$
—

Securities purchased under agreements to resell
 
—

 
1,350,000

 
1,000,000

 
1,999,000

 
—

 
—

Federal funds sold
 
—

 
1,450,000

 
3,010,000

 
—

 
—

 
—

Total money-market instruments
 
—

 
2,800,296

 
4,288,750

 
1,999,000

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 

 
 

 
 

 
 

 
 

 
 
U.S. agency obligations
 
—

 
1,602

 
—

 
—

 
—

 
—

U.S. Treasury obligations
 
—

 
309,332

 
—

 
—

 
—

 
—

U.S. government-owned corporations
 
—

 
285,772

 
—

 
—

 
—

 
—

GSEs
 
—

 
120,353

 
—

 
—

 
—

 
—

Supranational institutions
 
422,178

 
—

 
—

 
—

 
—

 
—

HFA securities
 
27,197

 
42,847

 
105,059

 
—

 
—

 
—

Total non-MBS
 
449,375

 
759,906

 
105,059

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - single-family
 
—

 
129,508

 
—

 
—

 
—

 
—

U.S. government guaranteed - multifamily
 
—

 
492,037

 
—

 
—

 
—

 
—

GSE – single-family
 
—

 
4,827,338

 
—

 
—

 
—

 
—

GSE – multifamily
 
—

 
1,539,641

 
—

 
—

 
—

 
—

Private-label – residential
 
—

 
4,131

 
13,300

 
66,489

 
637,593

 
17,791

ABS backed by home-equity loans
 
598

 
1,136

 
5,133

 
1,569

 
3,602

 
—

Total MBS
 
598

 
6,993,791

 
18,433

 
68,058

 
641,195

 
17,791


 


 


 
 
 
 
 
 
 
 
Total investment securities
 
449,973

 
7,753,697

 
123,492

 
68,058

 
641,195

 
17,791

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
449,973

 
$
10,553,993

 
$
4,412,242

 
$
2,067,058

 
$
641,195

 
$
17,791

_______________________
(1)
Ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of June 30, 2017. If there is a split rating, the lowest rating is used.


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At June 30, 2017, our unsecured credit exposure related to money-market instruments and debentures, including accrued interest, was $5.9 billion to 15 counterparties and issuers, of which $4.5 billion was for federal funds sold, $1.2 billion was for debentures issued by GSEs and supranational institutions, and $279.0 million was for interest-bearing deposits.

Private-Label MBS

Of our $8.1 billion in par value of MBS and ABS investments at June 30, 2017, $1.2 billion in par value are private-label MBS and ABS backed by home equity loans, as set forth in the table below:

Unpaid Principal Balance of Private-Label MBS and ABS Backed by Home Equity Loans
by Fixed Rate or Variable Rate
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Private-label MBS
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
 
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
Private-label residential MBS
 

 
 

 
 

 
 

 
 

 
 

Prime
$
8,264

 
$
90,483

 
$
98,747

 
$
8,780

 
$
102,747

 
$
111,527

Alt-A
16,921

 
1,067,491

 
1,084,412

 
18,808

 
1,161,415

 
1,180,223

Total private-label residential MBS
25,185

 
1,157,974

 
1,183,159

 
27,588

 
1,264,162

 
1,291,750

ABS backed by home equity loans
 

 
 

 
 

 
 

 
 

 
 

Subprime
—

 
12,865

 
12,865

 
—

 
13,848

 
13,848

Total par value of private-label MBS
$
25,185

 
$
1,170,839

 
$
1,196,024

 
$
27,588

 
$
1,278,010

 
$
1,305,598

_______________________
 (1)
The determination of fixed or variable rate is based upon the contractual coupon type of the security.

The following table provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The table sets forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS. Average current credit enhancements as of June 30, 2017 reflect the percentage of subordinated class outstanding balances as of June 30, 2017, to our senior class outstanding balances as of June 30, 2017, weighted by the par value of our respective senior class securities. Average current credit enhancements as of June 30, 2017, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.


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Private-Label MBS and ABS Backed by Home Equity
As of June 30, 2017
(dollars in thousands)
 
 
 
Total
Par value by credit rating
 

Triple-A
$
598

Double-A
5,267

Single-A
18,433

Triple-B
68,058

Below Investment Grade
 
Double-B
28,489

Single-B
49,344

Triple-C
507,394

Double-C
280,889

Single-C
17,035

Single-D
197,306

Unrated
23,211

Total par value
$
1,196,024

 
 
Amortized cost
$
926,409

Gross unrealized gains
94,585

Gross unrealized losses
(16,215
)
Fair value
$
1,004,779

 
 
Weighted average percentage of fair value to par value
84.01
%
Original weighted average credit support
27.20

Weighted average credit support
8.36

Weighted average collateral delinquency (1)
19.99

_______________________
 (1)
Represents loans that are 60 days or more delinquent.

Mortgage Loans

We invest in mortgages through the MPF program. The MPF program is further described under — Mortgage Loans Credit Risk and in Item 1 — Business — Business Lines — Mortgage Loan Finance in the 2016 Annual Report.

As of June 30, 2017, our mortgage loan investment portfolio totaled $3.8 billion, an increase of $110.7 million from December 31, 2016. We expect continued competition from Fannie Mae and Freddie Mac for loan investment opportunities.

Mortgage Loans Credit Risk

We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans — Mortgage Loans Credit Risk in the 2016 Annual Report.

Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in the following table:


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Table of Contents


State Concentrations by Outstanding Principal Balance
 
Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans
 
June 30, 2017
 
December 31, 2016
 
 

 
 

Massachusetts
53
%
 
51
%
Maine
12

 
13

Wisconsin
8

 
9

Connecticut
7

 
7

New Hampshire
6

 
6

All others
14

 
14

Total
100
%
 
100
%

Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $500,000 at June 30, 2017, compared with $650,000 at December 31, 2016.

For information on the determination of the allowance at June 30, 2017, see Item 1 — Notes to the Financial Statements — Note 10 — Allowance for Credit Losses, and for information on our methodology for estimating the allowance, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Allowance for Loan Losses in the 2016 Annual Report.

We place conventional mortgage loans on nonaccrual status when the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is reversed against interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis. Our investments in conventional mortgage loans that are delinquent are shown in the following table:

Delinquent Mortgage Loans
(dollars in thousands)
 
June 30, 2017
 
December 31, 2016
Total par value of government loans past due 90 days or more and still accruing interest
$
4,789

 
$
5,527

Nonaccrual loans, par value
12,980

 
16,918

Troubled debt restructurings (not included above)
6,921

 
6,846


Mortgage Insurance Companies. We are exposed to credit risk from supplemental mortgage insurance (SMI) companies that provide credit enhancement in place of the participating financial institution and for primary mortgage insurance coverage (PMI) on individual loans. As of June 30, 2017, we were the beneficiary of PMI coverage of $81.7 million on $320.2 million of conventional mortgage loans, and SMI coverage of $17.4 million on mortgage pools with a total unpaid principal balance of $123.9 million.

We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses based on these exposures at this time.

Consolidated Obligations

See — Liquidity and Capital Resources for information regarding our COs.

Derivative Instruments
 
All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Bilateral and cleared derivatives outstanding are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $56.6 million and $61.6 million as of June 30, 2017, and December 31, 2016, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $329.2 million and $357.9 million as of June 30, 2017, and December 31, 2016, respectively.


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Table of Contents


The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of June 30, 2017, and December 31, 2016. The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk. The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents derivative hedging specific or nonspecific assets, liabilities, or firm commitments that does not qualify or was not designated for fair-value or cash-flow hedge accounting, but are acceptable hedging strategies under our risk-management policy.
Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Hedged Item
 
Derivative
 
Designation
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances (1)
 
Swaps
 
Fair value
 
$
8,891,965

 
$
21,202

 
$
9,976,494

 
$
11,504

 
 
Swaps
 
Economic
 
858,900

 
(668
)
 
857,000

 
136

Total associated with advances
 
 
 
 
 
9,750,865

 
20,534

 
10,833,494

 
11,640

Available-for-sale securities
 
Swaps
 
Fair value
 
611,915

 
(287,705
)
 
611,915

 
(290,312
)
Trading securities
 
Swaps
 
Economic
 
192,000

 
(7,007
)
 
192,000

 
(9,279
)
COs
 
Swaps
 
Fair value
 
6,708,960

 
(42,519
)
 
7,627,400

 
(60,904
)
 
 
Swaps
 
Economic
 
—

 
—

 
150,000

 
(30
)
 
 
Forward starting swaps
 
Cash Flow
 
527,800

 
(41,099
)
 
527,800

 
(36,250
)
Total associated with COs
 
 
 
 
 
7,236,760

 
(83,618
)
 
8,305,200

 
(97,184
)
Total
 
 
 
 
 
17,791,540

 
(357,796
)
 
19,942,609

 
(385,135
)
Mortgage delivery commitments
 
 
 
 
 
71,314

 
(98
)
 
22,524

 
(101
)
Total derivatives
 
 
 
 
 
$
17,862,854

 
(357,894
)
 
$
19,965,133

 
(385,236
)
Accrued interest
 
 
 
 
 
 

 
(18,730
)
 
 

 
(19,973
)
Netting adjustments, cash collateral, and variation margin for daily settled contracts including related accrued interest
 
 
 
 
 
 
 
104,018

 
 
 
108,931

Net derivatives
 
 
 
 
 
 

 
$
(272,606
)
 
 

 
$
(296,278
)
Derivative asset
 
 
 
 
 
 

 
$
56,623

 
 

 
$
61,598

Derivative liability
 
 
 
 
 
 

 
(329,229
)
 
 

 
(357,876
)
Net derivatives
 
 
 
 
 
 

 
$
(272,606
)
 
 

 
$
(296,278
)
 _______________________
(1)
As of June 30, 2017, and December 31, 2016, embedded derivatives separated from the advance contract with notional amounts of $858.9 million and $857.0 million, respectively, and fair values of $640,000 and $(153,000), respectively, are not included in the table.

The following tables 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 $15.6 billion, representing 87.3 percent of all derivatives outstanding as of June 30, 2017. Economic hedges and cash-flow hedges are not included within the two tables below.


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Table of Contents


Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of June 30, 2017
(dollars in thousands)
 
 
 
 
 
 
 
 
 
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
$
2,283,185

 
$
(4,258
)
 
$
2,283,185

 
$
4,111

 
2.17
%
 
1.19
%
 
2.04
%
 
1.32
%
Due after one year through two years
1,557,675

 
678

 
1,557,675

 
(882
)
 
1.83

 
1.21

 
1.56

 
1.48

Due after two years through three years
1,462,301

 
8,948

 
1,462,301

 
(9,024
)
 
1.65

 
1.19

 
1.41

 
1.43

Due after three years through four years
1,259,938

 
8,313

 
1,259,938

 
(8,566
)
 
1.84

 
1.20

 
1.48

 
1.56

Due after four years through five years
931,365

 
(1,007
)
 
931,365

 
828

 
2.30

 
1.22

 
1.89

 
1.63

Thereafter
1,397,500

 
8,528

 
1,397,500

 
(8,515
)
 
1.00

 
1.22

 
0.61

 
1.61

Total
$
8,891,964

 
$
21,202

 
$
8,891,964

 
$
(22,048
)
 
1.81
%
 
1.20
%
 
1.53
%
 
1.48
%
_______________________
(1)
Not included in the fair value is $5.1 million of variation margin received for daily settled contracts.
(2)
Included in the advances hedged amount are $1.9 billion of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(3)
The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(4)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of June 30, 2017.
 
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of June 30, 2017
(dollars in thousands)
 
 
 
 
 
 
 
 
 
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
$
2,549,095

 
$
(4,224
)
 
$
2,549,095

 
$
4,207

 
1.04
%
 
1.04
%
 
1.16
%
 
1.16
%
Due after one year through two years
1,685,355

 
(9,567
)
 
1,685,355

 
9,392

 
1.08

 
1.07

 
1.14

 
1.15

Due after two years through three years
349,510

 
(3,084
)
 
349,510

 
2,940

 
1.14

 
1.16

 
1.12

 
1.10

Due after three years through four years
538,000

 
(3,056
)
 
538,000

 
2,921

 
1.28

 
1.28

 
1.12

 
1.12

Due after four years through five years
862,000

 
(8,779
)
 
862,000

 
8,732

 
1.40

 
1.40

 
1.03

 
1.03

Thereafter
725,000

 
(13,809
)
 
725,000

 
13,590

 
1.73

 
1.73

 
1.09

 
1.09

Total
$
6,708,960

 
$
(42,519
)
 
$
6,708,960

 
$
41,782

 
1.20
%
 
1.19
%
 
1.12
%
 
1.13
%
_______________________
(1)
Not included in the fair value is $5.5 million of variation margin paid for daily settled contracts.
(2)
Included in the CO bonds hedged amount are $3.2 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.
(3) 
The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.
(4)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of June 30, 2017.

We may engage in derivatives directly with affiliates of certain of our members that act as derivatives dealers to us. These derivatives are entered into for our own risk-management purposes and are not related to requests from our members to enter into such contracts.


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Derivative Instruments Credit Risk. We are subject to credit risk on derivatives, arising from the possibility 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 (i.e., we are in the money) 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 the derivatives table 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 (i.e., we are out-of-the-money) 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 negative fair-value positions 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 positive fair-value positions with them adjusted for any applicable exposure threshold. We pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member. The table below details our counterparty credit exposure as of June 30, 2017.

Derivatives Counterparty Current Credit Exposure
As of June 30, 2017
(dollars in thousands)

Credit Rating (1)
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged to Counterparty and Variation Margin for Daily Settled Contracts
 
Non-cash Collateral Pledged to Counterparty
 
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
1,320,400

 
$
(4,414
)
 
$
4,945

 
$
—

 
$
531

Single-A
 
629,000

 
149

 
110

 
—

 
259

 
 
 
 
 
 
 
 
 
 
 
Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
 
Single-A
 
164,750

 
(1,089
)
 
—

 
1,194

 
105

Triple-B
 
777,500

 
(7,003
)
 
—

 
7,016

 
13

Cleared derivatives
 
9,056,285

 
(25,814
)
 
81,548

 
—

 
55,734

Total derivative positions with nonmember counterparties to which we had credit exposure
 
11,947,935

 
(38,171
)
 
86,603

 
8,210

 
56,642

 
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments (2)
 
71,314

 
99

 
—

 
—

 
99

Total
 
$
12,019,249

 
$
(38,072
)
 
$
86,603

 
$
8,210

 
$
56,741

 
 
 
 
 
 
 
 
 
 
 
Derivative positions without credit exposure: (3)
 
 
 
 
 
 
 
 
 
 
Single-A
 
3,774,550

 
 
 
 
 
 
 
 
Triple-B
 
2,069,055

 
 
 
 
 
 
 
 
Total derivative positions without credit exposure
 
$
5,843,605

 

 
 
 
 
 
 

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_______________________
(1)
Uncleared derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.
(2)
Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
(3)
These represent derivatives positions with counterparties for which we are in a net liability position and for which we have delivered securities collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset.

For information on our approach to the credit risks arising from our use of derivatives, see Item 7 — Management’s Discussion
and Analysis and Results of Operations — Financial Condition — Derivative Instruments — Derivative Instruments Credit
Risk in the 2016 Annual Report.

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 Item 1 — Business — Consolidated Obligations in the 2016 Annual Report. Outstanding COs and the condition of the market for COs are discussed below under — Debt Financing — Consolidated Obligations. Our equity capital resources are governed by our capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.

Liquidity

Internal Liquidity Sources / Liquidity Management

We have developed a methodology and policies by which we measure and manage the Bank’s short-term liquidity needs based on projected net cash flow and contingent obligations.

Projected Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed assets and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise.

Structural Liquidity. We define structural liquidity as projected net cash flow (defined above) less assumed secondary uses of funds, for which we assume the following:

•
all maturing advances are renewed;
•
member overnight deposits are withdrawn at a rate of 50 percent per day;
•
outstanding standby letters of credit are drawn down at a rate of 50 percent spread equally over 86 days;
•
uncommitted lines of credit are drawn upon at a rate of 10 percent of the previous day's balance; and
•
MPF master commitments are funded at a rate of 10 percent of the previous days' total amount on the first day and at a rate of one percent on each day thereafter.

The above assumptions for secondary uses of funds are in excess of our ordinary experience, and therefore represent a more stressful scenario than we expect to experience. We review these assumptions periodically.

This methodology for measuring projected net cash flow and structural liquidity has been established by management to monitor our liquidity position on a daily basis, and to help ensure that we meet all of our obligations as they come due and to meet our members' potential demand for liquidity from us in all cases. We may adjust the amount of liquidity maintained as market conditions change from time to time using projected net cash flow and structural liquidity measurements.

Liquidity Management Action Triggers. We maintain two liquidity management action triggers:


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•
if structural liquidity is less than negative $1.0 billion on or before the fifth business day following the measurement date; and
•
if projected net cash flow falls below zero on or before the 21st day following the measurement date.

We did not exceed either of these thresholds at any time during the six months ended June 30, 2017. If either of these thresholds is exceeded, then management of the Bank is notified and determines whether any corrective action is necessary.

The following table presents our projected net cash flow and structural liquidity as of June 30, 2017.

Projected Net Cash Flow and Structural Liquidity
As of June 30, 2017
(dollars in thousands)

 
 
5 Business Days
 
21 Days
Uses of funds
 
 
 
 
Interest payable
 
$
7,600

 
$
29,613

Maturing liabilities
 
3,858,741

 
10,036,743

Committed asset settlements
 
141,038

 
141,038

Capital outflow
 
209,301

 
209,301

MPF delivery commitments
 
71,314

 
71,314

Gross uses of funds
 
4,287,994

 
10,488,009

 
 
 
 
 
Sources of funds
 
 
 
 
Interest receivable
 
41,452

 
73,433

Maturing or projected amortization of assets
 
11,759,697

 
17,957,745

Committed liability settlements
 
83,607

 
92,852

Cash and due from banks and interest bearing deposits
 
455,561

 
455,561

Other
 
6,322

 
6,322

Gross sources of funds
 
12,346,639

 
18,585,913

 
 
 
 
 
Projected net cash flow
 
8,058,645

 
$
8,097,904

 
 
 
 
 
Less: Secondary uses of funds
 
 
 
 
Deposit runoff
 
406,038

 
 
Drawdown of standby letters of credit and lines of credit
 
645,255

 
 
Rollover of all maturing advances
 
3,933,110

 
 
Projected funding of MPF master commitments
 
193,562

 
 
Total secondary uses of funds
 
5,177,965

 

 
 
 
 
 
Structural liquidity
 
$
2,880,680

 


Contingency Liquidity. FHFA regulations require that we hold contingency liquidity in an amount sufficient to enable us to cover our operational requirements for a minimum of five business days without access to the CO debt markets. The FHFA defines contingency liquidity as projected sources of funds less uses of funds, excluding reliance on access to the CO debt markets and including funding a portion of outstanding standby letters of credit. For this purpose, outstanding standby letters of credit are assumed to be drawn down at a rate of 50 percent spread equally over 86 days following the measurement date. As defined by FHFA regulations, additional contingent sources of liquidity include the following:

•
marketable securities with a maturity greater than one week and less than one year that can be sold;
•
self-liquidating assets with a maturity of seven days or less;

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•
assets that are generally accepted as collateral in the repurchase agreement market, for which we include 50 percent of unencumbered marketable securities with a maturity greater than one year; and
•
irrevocable lines of credit from financial institutions rated not lower than the second highest rating category by an NRSRO.

We complied with this regulatory requirement at all times during the six months ended June 30, 2017. As of June 30, 2017 and December 31, 2016, we held a surplus of $13.9 billion and $13.4 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO debt issuance.

The following table presents our contingency liquidity as of June 30, 2017.

Contingency Liquidity
As of June 30, 2017
(dollars in thousands)

 
 
5 Business Days
Cumulative uses of funds
 
 
Interest payable
 
$
7,600

Maturing liabilities
 
3,858,741

Committed asset settlements
 
141,038

Drawdown of standby letters of credit
 
123,471

Gross uses of funds
 
4,130,850

 
 
 
Cumulative sources of funds
 
 
Interest receivable
 
41,452

Maturing or amortizing advances
 
3,933,110

Committed liability settlements
 
83,607

Other
 
6,322

Gross sources of funds
 
4,064,491

 
 
 
Plus: sources of contingency liquidity
 
 
Marketable securities
 
1,810,109

Self-liquidating assets
 
7,809,000

Cash and due from banks and interest bearing deposits
 
455,561

Marketable securities available for repo
 
3,911,017

Total sources of contingency liquidity
 
13,985,687

 
 
 
Net contingency liquidity
 
$
13,919,328


Additional Liquidity Requirements. In addition, certain FHFA guidance requires us to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario assumes that we cannot borrow funds from the capital markets for a period of 15 business days and that during that time we do not renew any maturing, prepaid, and put or called advances. The second scenario assumes that we cannot raise funds in the capital markets for five business days and that during that period we will renew maturing and called advances for all members except very large, highly rated members. We were in compliance with these liquidity requirements at all times during the six months ended June 30, 2017.

We are focused on maintaining a liquidity and funding balance between our financial assets and financial liabilities. The FHLBanks work collectively to manage the System-wide liquidity and funding management and the FHLBanks jointly monitor the System’s collective risk arising out of an inability to fully access the capital markets to fund our obligations. In managing and monitoring the amounts of assets that require refunding, we consider contractual maturities of our financial assets, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments and scheduled amortizations) and other factors in our discretion.

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Balance Sheet Funding Gap Policy. The Bank is exposed to refinancing risk due to the fact that over certain time horizons, it has more liabilities than assets maturing. To adequately fund assets the maturing liabilities must be replaced by new liabilities at potentially higher cost, putting spread margin at risk. In order to manage the Bank’s refinancing risk, we maintain an appropriate funding balance between financial assets and financial liabilities and maintain a policy that limits the potential difference between the amount of financial assets and the amount of financial liabilities expected to mature within three-month and one-year time horizons inclusive of projected prepayment and call activity. We measure this difference, or gap, as a percentage of total assets under two alternative formats. One funding gap format effectively assumes that all floating rate advances indexed to the discount note auction rate that both mature beyond the three-month or one-year time horizon and are prepayable without fees on coupon reset dates mature within the three-month or one-year time horizon; this assumption results in an adjustment that reduces the funding gap measurement. (Such advances are not subject to margin compression because the cost of the refinanced debt defines the reset rate on the advance coupon.) The other funding gap format includes no such adjustment. The Bank has instituted a limit and management action trigger framework around these metrics as follows:

Funding Gap Metric (1)
 
Limit
 
Management Action Trigger
 
Actual as of June 30, 2017
3-month Funding Gap
 
 
 
 
 
 
No Adjustment for Floating Rate Advances Indexed to Discount Note Auction
 
35%
 
25%
 
5.7
 %
Floating Rate Advances Indexed to Discount Note Auction assumed to have less than three-month maturity
 
20%
 
10%
 
(3.4
)%
 
 
 
 
 
 
 
1-year Funding Gap
 
 
 
 
 
 
No Adjustment for Floating Rate Advances Indexed to Discount Note Auction
 
35%
 
25%
 
11.9
 %
Floating Rate Advances Indexed to Discount Note Auction assumed to have less than one-year maturity
 
20%
 
10%
 
3.0
 %
 _______________________
(1)
The funding gap metric is a positive value when maturing liabilities exceed maturing assets, as defined, within the given time period.

Funding Concentration Policy. To limit the liquidity risk potentially associated with a high volume of short-term debt refinancing, we have adopted a funding concentration policy that limits the volume of discount notes outstanding as a proportion of total assets, effective March 24, 2017. The policy establishes a management action trigger when discount notes (excluding the amount of discount notes matched to short-term advances) exceed 40 percent of total assets. In addition, we have adopted a separate management action trigger that is triggered when total discount notes exceed 50 percent of assets. Finally, discount notes are limited to no more than 65 percent of total assets.

External Sources of Liquidity

Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement as discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — External Sources of Liquidity in the 2016 Annual Report. Under the terms of that agreement, in the event we do not fund our principal and interest payments under a CO by deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. We would then be required to repay the funding FHLBanks. We have never drawn funding under this agreement.

Debt Financing — Consolidated Obligations
 
At June 30, 2017, and December 31, 2016, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $56.4 billion and $57.2 billion, respectively.

CO bonds outstanding for which we are primarily liable include issued callable bonds totaling $4.0 billion and 4.7 billion at June 30, 2017, and December 31, 2016, respectively.

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CO discount notes comprised 49.4 percent and 52.5 percent of the outstanding COs for which we are primarily liable at June 30, 2017, and December 31, 2016, respectively, but accounted for 94.0 percent and 88.7 percent of the proceeds from the issuance of such COs during the six months ended June 30, 2017 and 2016, respectively.

Financial Conditions for Consolidated Obligations

Overall, we have experienced relatively low CO issuance costs during the period covered by this report, reflecting continued high demand for all tenors of COs with the strongest demand for short-term COs. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. We note that capacity among our CO underwriters has been occasionally somewhat constrained as a result of the imposition of higher capital requirements on many of our underwriters. So far, this development has not impeded our ability to meet our funding needs. Throughout the first quarter of 2017, COs were issued at yields that were generally at or below equivalent-maturity LIBOR swap yields for debt maturing in less than five years, while longer-term issues bore funding costs that were typically higher than equivalent maturity LIBOR swap yields. During the period covered by this report, CO yields generally moved with U.S. dollar interest rate swaps and comparable U.S. Treasury yields, though minor spread fluctuations occurred between these series. We believe that the market’s reaction to recent and expected changes in FOMC monetary policies, including the anticipated decision to reduce the Federal Reserve’s holdings of U.S. Treasury obligations and mortgage-backed securities, will be an important factor that could shape investor demand for debt, including COs, for the remainder of 2017.

Capital

Total capital at June 30, 2017, was $3.3 billion compared with $3.2 billion at year-end 2016.

The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at June 30, 2017, as discussed in Item 1 — Notes to the Financial Statements — Note 15 — Capital.

Subject to applicable law, following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $37.4 million and $32.7 million at June 30, 2017, and December 31, 2016, respectively. For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 8 — Financial Statements and Supplementary Data —Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock in the 2016 Annual Report.

The following table sets forth the amount of mandatorily redeemable capital stock by year of expiry of the redemption-notice period at June 30, 2017, and December 31, 2016 (dollars in thousands).

Expiry of Redemption-Notice Period
 
June 30, 2017
 
December 31, 2016
Past redemption date (1)
 
$
528

 
$
528

Due in one year or less
 
4,687

 
—

Due after one year through two years
 
128

 
4,687

Due after two years through three years
 
27,304

 
27,378

Due after three years through four years
 
—

 
54

Due after four years through five years
 
4,703

 
—

Thereafter (2)
 
30

 
40

Total
 
$
37,380

 
$
32,687

_______________________
(1)
Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption-notice period but the member-related activity (for example, advances) remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.
(2)
Amount represents reclassifications to mandatorily redeemable capital stock resulting from an FHFA rule effective February 19, 2016, that makes captive insurance companies ineligible for membership. Captive insurance company

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members that were admitted as members prior to September 12, 2014, will have their memberships terminated no later than February 19, 2021. Captive insurance company members that were admitted as members on or after September 12, 2014, had their memberships terminated prior to February 19, 2017.

We have the authority, but are not obliged, to repurchase excess stock, as discussed under Item 1 — Business — Capital Resources — Repurchase of Excess Stock in the 2016 Annual Report and as further discussed below under Liquidity and Capital Resources — Internal Capital Practices and Policies — Repurchase of Excess Stock. At June 30, 2017, and December 31, 2016, excess capital stock totaled $209.3 million and $78.3 million, respectively, as set forth in the following table (dollars in thousands):

 
Membership Stock
Investment
Requirement
 
Activity-Based
Stock Investment
Requirement
 
Total Stock
Investment
Requirement (1)
 
Outstanding Class B
Capital Stock (2)
 
Excess Class B
Capital Stock
June 30, 2017
$
700,656

 
$
1,536,048

 
$
2,236,726

 
$
2,446,027

 
$
209,301

December 31, 2016
670,301

 
1,695,397

 
2,365,720

 
2,443,993

 
78,273

_______________________
(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.

Capital Rule

The FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated June 21, 2017, the Director of the FHFA notified us that, based on March 31, 2017 financial information, we met the definition of adequately capitalized under the Capital Rule.

For additional information on the Capital Rule, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Capital Rule in the 2016 Annual Report.

Internal Capital Practices and Policies

We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital, reflected in our targeted capital ratio operating range, internal minimum capital requirement in excess of regulatory requirements, minimum retained earnings target, and limitations on dividends.

Targeted Capital Ratio Operating Range

We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 6.1 percent at June 30, 2017.

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must be at least equal to the sum of four percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of June 30, 2017, this internal minimum capital requirement equaled $3.0 billion, which was satisfied by our actual regulatory capital of $3.7 billion.

Reduction of Activity-Based Stock Investment Requirement

On April 18, 2017, we announced that we would reduce the ABSIR for advances with original maturities of more than three months from 4.5 percent to 4.0 percent. On May 1, 2017, we provided written notice to shareholders of the effective date of this change, which is the close of business on May 31, 2017. We reduced our ABSIR in an effort to gain efficiency in our capital structure, as we currently exceed internal and regulatory minimum capital requirements.


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Repurchases of Excess Stock

On April 3, 2017, we conducted a partial repurchase of excess capital stock under the Excess Stock Management Program. This excess stock repurchase transaction was initiated in response to the decline in advances that we experienced during the quarter ending June 30, 2017.

On May 1, 2017, we provided a notice to our shareholders that we would replace our existing system of making periodic repurchases of excess capital stock when aggregate excess stock balances exceeded $200 million. We announced that on June 1, 2017, we would begin daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 25 percent of the shareholder's total stock investment requirement, subject to a minimum repurchase of $100,000. On July 27, 2017, we announced that effective on August 11, 2017, we would change the calculation that determines whether a shareholder’s excess stock balances will be subject to a daily repurchase of excess stock. We announced that beginning on August 11, 2017, we would repurchase excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000.

Excess stock repurchases for the six months ended June 30, 2017 amounted to $517.8 million.

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.

Off-balance-sheet arrangements are more fully discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 19 — Commitments and Contingencies in the 2016 Annual Report.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

We have identified five accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, accounting for deferred premiums and discounts on prepayable assets, the allowance for loan losses, and other-than-temporary-impairment of investment securities. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2016 Annual Report.

As of June 30, 2017, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements.

RECENT ACCOUNTING DEVELOPMENTS
 
See Item 1 —Notes to the Financial Statements — Note 3 — Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

Recent significant regulatory actions and developments are summarized below.


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FHLBank Capital Requirements. On July 3, 2017, the FHFA published a proposed rule to adopt, with amendments, the regulations of the Federal Housing Finance Board (predecessor to the FHFA) pertaining to the capital requirements of the FHLBanks. The proposed rule would carry over most of the existing regulations without material change but would substantively revise the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The proposed rule would remove requirements that the FHLBanks calculate credit risk capital charges and unsecured credit limits based on ratings issued by a nationally recognized statistical rating organization, and instead require that the FHLBanks establish and use their own internal rating methodology. With respect to derivatives, the proposed rule would impose a new capital charge for cleared derivatives, which under the existing rule do not carry a capital charge, to align with the Dodd-Frank Act’s clearing mandate. The proposed rule also would revise the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The FHFA proposes to retain for now the percentages used in the tables to calculate capital charges for mortgage-related assets and to address the methodology for residential mortgage assets at a later date. While a March 2009 regulatory directive pertaining to certain liquidity matters will continue to remain in place, the FHFA also proposes to rescind certain minimum regulatory liquidity requirements for the FHLBanks and address these liquidity requirements in a separate rulemaking.

The Bank is continuing to evaluate the proposed rule but does not expect this rule, if adopted in final form, to materially affect our financial condition or results of operations. Comments on the proposed rule are due by September 1, 2017.

Minority and Women Inclusion. On July 25, 2017, the FHFA published a final rule, effective August 24, 2017, amending its Minority and Women Inclusion regulations to clarify the scope of the FHLBanks’ obligation to promote diversity and ensure inclusion. The final rule updates the existing FHFA regulations aimed at promoting diversity and the inclusion and use of minorities, women, and individuals with disabilities and the businesses they own (MWDOB) in all FHLBank business and activities, including management, employment, and contracting. The final rule will:
•
require the FHLBanks to develop stand-alone diversity and inclusion strategic plans or incorporate diversity and inclusion into their existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;
•
encourage the FHLBanks to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements;
•
require the FHLBanks to develop policies that address reasonable accommodations for employees to observe their religious beliefs;
•
require the FHLBanks to provide information in their annual reports to the FHFA about their efforts to advance diversity and inclusion through financial transactions; identification of ways in which FHLBanks might be able to improve MWDOB business with the FHLBanks by enhancing customer access to MWDOB businesses, including through their affordable housing and community investment programs; and strategies for promoting the diversity of supervisors and managers; and
•
require the FHLBanks to classify and provide additional data in their annual reports about the number and amounts paid under their contracts.

The Bank does not expect this final rule to materially affect its financial condition or results of operations, but anticipates that it may result in increased compliance costs and substantially increase the amount of tracking, monitoring, and reporting that would be required of the Bank.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sources and Types of Market and Interest-Rate Risk
 
Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. Sources and types of market and interest-rate risk are described in Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Sources and Types of Market and Interest-Rate Risk in the 2016 Annual Report.

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 including the following and combinations of the following:

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•
the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at June 30, 2017, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $14.3 billion, compared with $13.5 billion at December 31, 2016);
•
the use of derivatives and/or COs with embedded call options to hedge the interest-rate risk of our debt (at June 30, 2017, fixed-rate callable debt not hedged by interest-rate swaps amounted to $797.0 million compared with $667.0 million at December 31, 2016);
•
the issuance of CO bonds together with interest-rate swaps that receive a coupon that offsets the bond coupon and any optionality embedded in the bond, thereby effectively creating a floating-rate liability (total CO bond debt used in conjunction with interest-rate-exchange agreements was $6.7 billion, or 23.5 percent of our total outstanding CO bonds at June 30, 2017, compared with $7.6 billion, or 28.1 percent of total outstanding CO bonds, at December 31, 2016);
•
contractual provisions for certain advances that require borrowers to pay us prepayment fees, to make us financially indifferent if the borrower prepays such advances prior to maturity; and
•
the use of callable debt for a portion of our investments in mortgage loans to manage the interest-rate and prepayment risks from these investments.

Each of the foregoing strategies and techniques is more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Strategies to Manage Market and Interest-Rate Risk in the 2016 Annual Report.

Measurement of Market and Interest-Rate Risk and Related Policy Constraints

We measure our exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure Value at Risk (VaR), duration of equity, convexity, and the other metrics discussed below.

MVE is the net economic value of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the estimated market value of our assets and the estimated market value of our liabilities.

MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. However, these valuations may not be fully representative of future realized prices. Valuations are based on market curves and prices of individual assets, liabilities, and derivatives, and therefore embed elements of option, credit, and liquidity risk which may not be representative of future net income to be earned from the spread between asset yields and funding costs. Further, MVE does not consider future new business activities, or income or expense derived from sources other than financial assets or liabilities.

We measure our exposure to market and interest-rate risk using several metrics, including:

•
the ratio of MVE to BVE;
•
the ratio of MVE to the par value of our Class B Stock (Par Stock), which we refer to as the MVE to Par Stock ratio;
•
the ratio of MVE to the market value of assets, which we refer to as the economic capital ratio;
•
VaR, which measures the change in our MVE to a 99th percent confidence interval, based on a set of stress scenarios (VaR Stress Scenarios) using historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992;
•
duration of equity, which measures the estimated percentage change to market value for a 100 basis point shift in rates;
•
MVE sensitivity, which is the estimated percent change in MVE in various shocked interest rate scenarios vs. base case MVE;
•
the duration gap of our assets and liabilities, which is the difference between the estimated durations (percentage change in market value for a 100 basis point shift in rates) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities are matched;
•
targeted metrics for our investments in mortgage loans; and
•
the use of an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to our funding curve and LIBOR.

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We maintain limits and management action triggers in connection with each of the foregoing metrics. Those limits, management action triggers, and the foregoing market and interest-rate risk metrics are more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints in the 2016 Annual Report.

The following table sets forth each of the foregoing metrics together with any targets, associated limits and management actions triggers at June 30, 2017, and December 31, 2016.

Interest/Market-Rate Risk Metric
 
June 30, 2017
 
December 31, 2016
 
Target, Limit or Management Action Trigger
MVE
 
$3.7 billion
 
$3.6 billion
 
None
MVE/BVE
 
100%
 
98%
 
None
MVE/Par Stock
 
151%
 
148%
 
Maintain above 102% (management action trigger) and 100% or higher (limit)
Economic Capital Ratio
 
6.0%
 
5.8%
 
Maintain above 4.5% (management action trigger) and 4.0% (limit)
VaR
 
$152.2 million
 
$118.8 million
 
Maintain below $225.0 million (management action trigger) and $275.0 million (limit)
Duration of Equity
 
+0.68 years
 
+1.67 years
 
Maintain between +/- 3.5 years (management action trigger) and +/- 4.0 years (limit)
MVE Sensitivity in a +/- 200 basis point parallel rate shock
 
(5.1)%
 
(6.3)%
 
Maintain above -10% (management action trigger) and -15% (limit)
Duration Gap
 
+0.49 months
 
+1.17 months
 
None
MPF Portfolio VaR
 
$78.1 million
 
$76.9 million
 
Maintain below 25% of the VaR limit ($275 million) (management action trigger)
Income Simulation based on an instantaneous rise in interest rates of 300 basis points
 
Return on regulatory capital is 172 basis points above the average yield on three-month LIBOR
 
Return on regulatory capital is 207 basis points above the average yield on three-month LIBOR
 
Maintain projected return on regulatory capital above three-month LIBOR over the following 12 month horizon (management action trigger)

MPF Portfolio Management Action Trigger of 25 Percent of Our VaR Limit. We have established a management action trigger for VaR exposure from our investments in mortgage loans through the MPF program such that the VaR from these investments shall not exceed 25 percent of our overall VaR limit. While we seek to limit interest-rate risk through matching asset maturity and optionality with its corresponding funding, mortgage loans cannot be perfectly match funded due to factors including, but not limited to, borrower prepayment behavior and basis risk between the swap and our funding curves. This management action trigger was $68.8 million at June 30, 2017 and December 31, 2016, based on our overall VaR limit of $275.0 million. Our actual MPF portfolio VaR exposure at June 30, 2017, was $78.1 million, compared with $76.9 million as of December 31, 2016.

We exceeded the MPF Portfolio VaR management action trigger at both December 31, 2016 and June 30, 2017. This was largely the result of the recent increase in interest rates and projected extension of the MPF portfolio beyond that experienced by the CO debt used to fund this portfolio. Management reviewed the risk exposure in the MPF portfolio and the risk exposure of the entire balance sheet as required by the trigger. The risk of the overall balance sheet as measured by VaR remained well below both its management action trigger and limit, and management decided that no reduction to the MPF risk profile was required. Should we continue to exceed our MPF VaR management action trigger, and should our VaR increase closer to its trigger and limit, we expect that management could reduce our risk exposure by making changes to the balance sheet including but not limited to altering the debt profile, which could have an adverse impact on income.

Value at Risk. The table below presents the historical simulation VaR estimate as of June 30, 2017, and December 31, 2016, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 120-business-day time horizon.

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Value-at-Risk
(Gain) Loss Exposure (1)
 
 
June 30, 2017
 
December 31, 2016
Confidence Level
 
% of
MVE (2)
 
$ million
 
% of
MVE (2)
 
$ million
50%
 
0.10
%
 
$
3.9

 
(0.01
)%
 
$
(0.4
)
75%
 
0.39

 
14.5

 
0.51

 
18.5

95%
 
2.13

 
78.6

 
1.87

 
67.4

99%
 
4.12

 
152.2

 
3.29

 
118.8

_______________________
(1)
To be consistent with FHFA guidance, we have excluded VaR stress scenarios prior to 1992 because market-risk stress conditions are effectively captured in those scenarios beginning in 1992 and therefore properly present our current VaR exposure.
(2)
Loss exposure is expressed as a percentage of base MVE.

Certain Market and Interest-Rate Risk Metrics under Potential Interest-Rate Scenarios

We also monitor the sensitivities of MVE and the duration of equity to potential interest-rate scenarios. The following table presents certain market and interest-rate risk metrics under different interest-rate scenarios (dollars in millions).

 
 
June 30, 2017
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,461
 
$3,536
 
$3,648
 
$3,694
 
$3,619
 
$3,504
 
$3,373
Percent change in MVE from base
 
(6.3)%
 
(4.3)%
 
(1.2)%
 
—%
 
(2.0)%
 
(5.1)%
 
(8.7)%
MVE/BVE
 
93.8%
 
95.8%
 
98.8%
 
100.1%
 
98.0%
 
94.9%
 
91.4%
MVE/Par Stock
 
141%
 
145%
 
149%
 
151%
 
148%
 
143%
 
138%
Duration of Equity
 
-1.00 years
 
-2.64 years
 
-2.60 years
 
+0.68 years
 
+2.81 years
 
+3.51 years
 
+4.03 years
Return on Regulatory Capital less 3-month LIBOR (2)
 
2.0%
 
2.2%
 
2.7%
 
2.8%
 
2.5%
 
2.1%
 
1.7%
Net income percent change from base
 
(53.1)%
 
(50.0)%
 
(25.9)%
 
—%
 
16.7%
 
31.7%
 
45.7%
____________________________
(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.
(2)
The income simulation metric for June 30, 2017 is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude a) interest expense on mandatorily redeemable capital stock; b) projected prepayment penalties; c) loss on early extinguishment of debt; and d) changes in fair values from trading securities and hedging activities.


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December 31, 2016
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE(2)
 
$3,385
 
$3,485
 
$3,618
 
$3,606
 
$3,506
 
$3,379
 
$3,240
Percent change in MVE from base
 
(6.1)%
 
(3.3)%
 
0.3%
 
—%
 
(2.8)%
 
(6.3)%
 
(10.1)%
MVE/BVE
 
92.5%
 
95.2%
 
98.8%
 
98.5%
 
95.8%
 
92.3%
 
88.5%
MVE/Par Stock
 
138%
 
143%
 
148%
 
148%
 
143%
 
138%
 
133%
Duration of Equity
 
-1.64 years
 
-3.35 years
 
-1.11 years
 
+1.67 years
 
+3.39 years
 
+3.93 years
 
+4.42 years
Return on Regulatory Capital less 3-month LIBOR (2)
 
2.4%
 
2.6%
 
2.9%
 
2.9%
 
2.6%
 
2.4%
 
2.1%
Net income percent change from base
 
(41.6)%
 
(37.3)%
 
(22.7)%
 
—%
 
18.2%
 
37.1%
 
55.2%
____________________________
(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.
(2)
The income simulation metric for December 31, 2016 is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude a) interest expense on mandatorily redeemable capital stock; b) projected prepayment penalties; c) loss on early extinguishment of debt; and d) changes in fair values from trading securities and hedging activities.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, with the participation of the president and chief executive officer and chief financial officer, as of the end of the period covered by this report. Based on that evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal quarter covered by this report.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2017, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We describe our private-label MBS litigation in Item 3 — Legal Proceedings in the 2016 Annual Report.


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From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

In addition to the information presented in this report, readers should carefully consider the risk factors set forth in the 2016 Annual Report, which could materially impact our business, financial condition, or future results. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially impact us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS
Number
 
Exhibit Description
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
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document

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.


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Date
 
FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
August 10, 2017
 
By:
/s/
Edward A. Hjerpe III
 
 
 
 
 
Edward A. Hjerpe III
President and Chief Executive Officer
August 10, 2017
 
By:
/s/
Frank Nitkiewicz
 
 
 
 
 
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer


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