Federal Home Loan Bank of Boston Announces 2020 Fourth Quarter and Annual Results, Declares Dividend

As previously announced, the board has been reevaluating the Bank’s dividend strategy in light of the pending cessation of LIBOR as the Bank’s dividend benchmark rate, as well as the ongoing financial challenges resulting from the COVID-19 pandemic, near-zero interest rates and significantly lower advances balances and their impact on the Bank’s current and projected earnings. Beginning with this announcement, the board has adopted the Secured Overnight Financing Rate (SOFR) as the Bank's dividend benchmark rate.

The Bank's board of directors has declared a dividend equal to an annual yield of 1.59 percent, the approximate daily average SOFR yield for the fourth quarter of 2020 plus 150 basis points. The dividend, based on average stock outstanding for the fourth quarter of 2020, will be paid on March 2, 2021. As always, dividends remain at the discretion of the board.

“FHLBank Boston, our members, and the New England communities they serve faced unprecedented challenges in 2020. Recent U.S. government monetary policy and fiscal stimulus programs in response to the pandemic and resulting economic downturn have led to near-zero interest rates and increased liquidity on member balance sheets,” said President and Chief Executive Officer Edward A. Hjerpe III. “Advance balances and net income declined as a result, and are expected to remain at reduced levels until the environment changes. Given the pending cessation of LIBOR and the challenging environment, we are changing the index to which we tie our dividend from three-month LIBOR to SOFR and reducing the spread to the new index. The Bank remains very well capitalized and maintains its steadfast commitment to fulfilling its mission."

The COVID-19 pandemic, which began to affect businesses and the economy in March 2020, continues, and interest rates remain historically low. The Bank’s overall results of operations are influenced by the economy and financial markets and, in particular, by members' demand for advances and the Bank's ability to maintain sufficient access to funding at relatively favorable costs.

Generally, investor demand for high credit quality, fixed-income investments, including the Federal Home Loan Banks' (FHLBanks') consolidated obligations, continued to be strong relative to other investments, and the Bank continued to meet its funding needs during this time. Spreads between the yields of FHLBanks' consolidated obligations and like-term U.S. Treasury securities have tightened significantly in recent months.

The Bank’s flexibility in utilizing various funding tools, in combination with a diverse investor base and its status as a government-sponsored enterprise, have helped provide reliable market access and demand for consolidated obligations throughout fluctuating market environments and regulatory changes affecting dealers of and investors in consolidated obligations. However, depository member institutions continue to report significantly elevated deposit balances, which has reduced demand for our advances and other forms of wholesale funding. This has been the primary reason for the significant decline in advances balances beginning in the second quarter of 2020. In addition, mortgage purchases by the Federal Reserve aimed at supporting the housing market through the pandemic have increased refinancing activity and, thus, prepayments of mortgage-related assets we hold and have tightened the yield spreads we earn on new mortgage acquisitions.

Our staff has been working remotely since the last week of March 2020. From March 2020 through the date of this announcement, the Bank has remained fully operational with minimal impact on services to our members and other counterparties. The Bank has a robust business continuity management program in place designed to ensure continued service to our members, and we expect that normal operations will remain in place even as employees continue to operate from remote locations.

Net income for the quarter ending December 31, 2020, was $22.2 million, compared with net income of $68.5 million for the same period in 2019. The decrease in net income for the quarter was primarily due to an increase in net unrealized losses on trading securities of $20.1 million, a decrease in gains on sales of held-to-maturity securities of $12.0 million, an increase in losses on early extinguishment of debt of $9.6 million, and a decline of $6.5 million in net interest income after provision for credit losses. These results led to a $2.5 million statutory contribution to the Bank's Affordable Housing Program for the quarter. In addition, the Bank made a voluntary contribution of $1.6 million to the Affordable Housing Program at the end of the year, bringing total contributions to the 2020 Affordable Housing Program to $15.0 million.

Net interest income after provision for credit losses for the three months ended December 31, 2020, was $61.8 million, compared with $68.3 million for the same period in 2019. The $6.5 million decrease in net interest income after provision for credit losses was driven by several factors, including the following: lower returns from investing the Bank’s capital and short-term investments held for liquidity management purposes in an ultra-low interest rate environment; a $10.5 billion decrease in the average balance of advances; a $2.0 billion decrease in the average balance of mortgage-backed securities; a $433.9 million decrease in the average balance of mortgage loans; and a $5.9 million decrease in accretion of significant improvement in projected cash flows resulting from sales of private-label mortgage-backed securities. These negative factors were partially offset by a $2.2 billion increase in the average balance of trading securities and the associated $11.1 million increase in interest income, a $9.4 million increase in prepayment fees on advances, and a $1.5 million reduction of the provision for credit losses relating to mortgage loans and private-label mortgage-backed securities primarily resulting from releasing the provision previously set aside for mortgage loans.

Net gains on derivatives and hedging activities for the three months ended December 31, 2020, totaled $2.4 million, compared with $2.5 million for the same period in 2019. The $2.4 million net gains for the current quarter mainly consisted of $11.3 million unrealized gains from changes in fair value on economic hedges, partially offset by $8.9 million of interest expense on economic hedges. Additionally, losses on trading securities totaled $19.7 million for the three months ended December 31, 2020. Together, these realized and unrealized gains and losses provided an economic offset primarily to interest income from trading securities, which totaled $21.0 million for the three months ended December 31, 2020.

For the three months ended December 31, 2020, losses on early retirement of debt totaled $14.8 million, which serve to offset prepayment fees earned on prepaid advances during the quarter and earlier this year, and is reflected in other income (loss). Additionally, in support of the affordable housing and economic development needs of communities that our members serve, during the three months ended December 31, 2020, the Bank recorded subsidy expense for the Jobs for New England and Helping to House New England programs totaling $10.0 million, which is reflected in other expense along with the $1.6 million voluntary contribution to the Affordable Housing Program.

Total assets decreased $17.2 billion, or 30.9 percent, to $38.5 billion at December 31, 2020, down from $55.7 billion at year-end 2019. During the year ended December 31, 2020, advances decreased $15.8 billion, or 45.6 percent, to $18.8 billion, compared with $34.6 billion at year-end 2019.

Total investments were $13.3 billion at December 31, 2020, down from $16.1 billion at the prior year end. Investments in mortgage loans totaled $3.9 billion at December 31, 2020, a decrease of $571.0 million from year-end 2019 driven by increased mortgage refinancing activity amid rapidly declining mortgage rates. Cash and due from banks totaled $2.1 billion at December 31, 2020, an increase of $2.0 billion from the prior year end.

GAAP capital at December 31, 2020, was $2.8 billion, a decrease of $363.4 million from $3.1 billion at year-end 2019. During 2020, capital stock decreased by $602.0 million, primarily attributable to the decrease in advances. Total retained earnings grew to $1.5 billion during 2020, an increase of $35.5 million, or 2.4 percent, from December 31, 2019. Of this amount, restricted retained earnings totaled $368.4 million at December 31, 2020. Accumulated other comprehensive income totaled $16.1 million at December 31, 2020, an improvement of $203.1 million, or 108.6 percent, from December 31, 2019.

As of December 31, 2020, the balance of restricted retained earnings exceeds the contribution requirement by $14.0 million, primarily the result of the decline in outstanding consolidated obligations. Accordingly, no allocation of net income was made to restricted retained earnings in the fourth quarter of 2020 and no further allocations of net income into restricted retained earnings are required until such time as the contribution requirement exceeds the balance of restricted retained earnings.

The Bank was in compliance with all regulatory capital ratios at December 31, 2020, and in the most recent information available was classified “adequately capitalized” by its regulator, the Federal Housing Finance Agency, based on the Bank's financial information at September 30, 2020.

To read the entire release, go here.