The Federal Home Loan Bank of Boston announced its preliminary, unaudited third-quarter financial results for 2021, reporting net income of $16.5 million for the quarter. The Bank expects to file its quarterly report on Form 10-Q for the quarter ended September 30, 2021, with the U.S. Securities and Exchange Commission next month.
The Bank’s board of directors has declared a dividend equal to an annual yield of 2.05 percent, the daily average of the Secured Overnight Financing Rate for the third quarter of 2021 plus 200 basis points. The dividend, based on average stock outstanding for the third quarter of 2021, will be paid on November 2, 2021. As always, dividends remain at the discretion of the board.
“Despite continued tempered demand for advances and historically low-interest rates, the Bank’s strong balance sheet and steady financial performance in the third quarter supported an increased dividend to our members of SOFR plus 200 basis points,” said President and Chief Executive Officer Edward A. Hjerpe III. “In addition, the Bank continues to fulfill its mission of providing liquidity and funding to our members, and supporting affordable housing and economic development throughout New England.”
Third Quarter 2021 Operating Highlights
The Bank’s overall results of operations are influenced by the economy, financial markets and, in particular, by members’ demand for advances. During the first nine months of 2021, interest rates remained significantly below pre-pandemic levels and we experienced a continued reduction in demand for advances from our members. Depository member institutions continued to report significantly elevated deposit balances, which has reduced demand for advances and other forms of wholesale funding.
Net income for the quarter ended September 30, 2021, was $16.5 million, compared with net income of $53.6 million for the same period in 2020. The decrease in net income for the quarter was primarily due to the absence of gains on sale of investment securities versus $32.9 million recorded in the third quarter of 2020, and a decrease of $11.1 million in net interest income after provision for credit losses offset by a reduction in net unrealized losses on trading securities of $8.5 million. These results led to a $1.8 million statutory contribution to the Bank’s Affordable Housing Program for the quarter. In addition, the Bank made a voluntary contribution of $1.2 million to the Affordable Housing Program.
Net interest income after provision for credit losses for the three months ended September 30, 2021, was $51.1 million, compared with $62.3 million for the same period in 2020. The $11.1 million decrease in net interest income after provision for credit losses is attributable to several factors. In the third quarter of 2020, the Bank sold a majority of its private-label mortgage-backed securities resulting in a reduction of the provision for credit losses of $5.1 million, whereas in the third quarter of 2021 the provision for credit losses, which is now solely attributable to mortgage loans, decreased by $80 thousand. Additionally, in the third quarter of 2021 compared to the third quarter of 2020, the Bank experienced an $8.9 billion decrease in the average balance of advances and an $899.2 million decrease in the average balance of mortgage loans. The Bank also experienced a decline of $419.8 million in the average balance of outstanding capital stock in the third quarter of 2021 compared to the third quarter of 2020. Net interest income was therefore negatively affected by lower income from investing the Bank’s capital. These negative factors were partially offset by increases to net interest income resulting from an increase in net interest margin and net interest spread as further discussed in the paragraph below, and a $1.5 billion increase in the average balance of U.S. Treasury obligations held as investment securities.
Net interest spread was 0.56 percent for the quarter ended September 30, 2021, a seven-basis-point increase from the same period in 2020, and net interest margin was 0.58 percent, a four-basis-point increase from the same period in 2020. The increase in both net interest spread and net interest margin mainly reflect an improvement in funding costs relative to the same period in 2020. In addition, net amortization of premium on mortgage-backed securities and mortgage loans decreased by $6.0 million.
Net gains and losses on derivatives and hedging activities for the three months ended September 30, 2021, totaled a net loss of $387 thousand, compared with a net gain of $1.6 million for the same period in 2020. The $387 thousand net loss for the current quarter consisted of an unrealized gain of $3.3 million from changes in fair value on economic hedges offset by $3.7 million of interest expense on economic hedges. Additionally, unrealized losses on trading securities totaled $11.1 million for the three months ended September 30, 2021. Together, these realized and unrealized gains and losses provided an economic offset primarily to interest income from trading securities, which totaled $11.5 million for the three months ended September 30, 2021.
September 30, 2021, Balance-Sheet Highlights
Total assets decreased $4.0 billion, or 10.4 percent, to $34.4 billion on September 30, 2021, down from $38.5 billion at year-end 2020. During the nine months ended September 30, 2021, advances decreased $4.8 billion, or 25.3 percent, to $14.1 billion, compared with $18.8 billion at year-end 2020.
Total investments were $16.4 billion on September 30, 2021, up from $13.3 billion at the prior year-end, primarily attributable to a $2.5 billion increase in U.S. Treasury obligations and a $1.6 billion increase in mortgage-backed securities. Investments in mortgage loans totaled $3.3 billion on September 30, 2021, a decrease of $646.3 million from year-end 2020 driven by increased mortgage refinancing activity amid continued low mortgage rates. Cash and due from banks totaled $205.3 million on September 30, 2021, a decrease of $1.8 billion from the prior year-end.
GAAP capital at September 30, 2021, was $2.6 billion, a decrease of $185.2 million from $2.8 billion at year-end 2020. During the first nine months of 2021, capital stock decreased by $239.0 million, primarily attributable to the decrease in advances. Total retained earnings grew by $29.3 million, or 2.0 percent, from December 31, 2020. Restricted retained earnings remained at $368.4 million on September 30, 2021, as this amount exceeds our contribution requirement of 1 percent of the average daily balance of consolidated obligations. Accumulated other comprehensive income totaled $40.6 million on September 30, 2021, an increase of $24.5 million, or 151.6 percent, from December 31, 2020.
The Bank was in compliance with all regulatory capital ratios on September 30, 2021, 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 on June 30, 2021.
