The Federal Home Loan Bank of Boston posted a 36 percent drop in year-over-year net income for the quarter ended June 30.
Net income for the second quarter this year totaled $35.6 million, compared with $56 million for the same period last year. In a statement, the bank attributed that decline primarily to a $22.6 million decrease in net prepayment fees from investments and advances.
"While we experienced a decline in prepayment fee income that has been anticipated for some time, this quarter’s modest increase in advances, continued growth in retained earnings, and reduction in other-than-temporary impairment charges underscore the ongoing improvement in the financial strength of the bank," President and CEO Edward Hjerpe said in the statement.
Net interest income after provision for credit losses was $61.9 million, compared with $89.9 million for the second quarter of 2012. Contributing to the $28 million decrease in net interest income after provision for credit losses was a decrease in net prepayment fees of $22.6 million from $28.3 million in the second quarter of 2012 to $5.7 million in the second quarter of 2013. Additionally, the decline in net interest income after provision for credit losses was due to a drop in average earning assets, which declined $8.6 billion from $46.1 billion for the second quarter of 2012, to $37.5 billion for the second quarter of 2013. The decline in average earning assets was driven by a $5.5 billion drop in average investments balances and a $3.3 billion decrease in average advances balances.
Additionally, $4.4 million of the bank’s interest income represented the accretion of discount from securities that were other-than-temporarily impaired in prior quarters, but for which a significant improvement in projected cash flows(2) has subsequently been recognized, an increase of $1.8 million from $2.6 million recorded the second quarter of 2012.
Net interest spread was 0.56 percent for the quarter ended June 30, a 12 basis point decrease from the same period in 2012, and net interest margin was 0.65 percent, a 13 basis point decrease during that time frame. The decrease in net interest spread reflects a 16 basis point decrease in the average yield on earning assets offset slightly by the four basis point decrease in average yield on interest-bearing liabilities. The decreases in net interest margin and net interest spread reflect the decline in prepayment fees.
In its earnings statement, the bank said it expects net interest margin and net interest spread to continue to decline based on the continuing low interest-rate environment. The decline in average earning assets over the last few years is likely to negatively affect future earnings, particularly since reinvestment opportunities are not as profitable in this low interest-rate environment.
