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73rd Annual Shareholders Meeting
Federal Home Loan Bank of Boston
April 19, 2006
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Agenda
The State of the Bank
Michael A. Jessee
The Future of Financial Services
Andrew Zolli
News from Washington
Cokie Roberts
Forward-Looking Statements
Michael A. Jessee’s address describes anticipated developments, projections, estimates, or future predictions of the Bank. These statements may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or variations on these terms. The Bank cautions that, by their nature, forward-looking statements are subject to a number of risks and uncertainties, and that actual results could differ materially from those expressed or implied in these forward-looking statements. As a result, you are cautioned not to place undue reliance on such statements.
FHLBank System
Remains Strong
• Members: 8,100+
• Total Assets: $998 billion – up 8%
• Advances: $620 billion – up 7%
• Mortgage Loans Held: $105 billion – down 8%
• Capital Stock: $44 billion – up 6%
• Net Income: $2.4 billion – up 25%
• Seven FHLBanks completed SEC registration, two filed initial statements, three reviewing FAS 133 accounting practices
• System securities remain AAA-rated
Based on Office of Finance, preliminary combined operating highlights
for yearend 2005 and yearend 2004
2005 FHLB Boston
Accomplishments
• Achieved record-breaking results
• Assets, advances, MPF
• Increased net income substantially and paid dividends consistently above short-term, market-rate indices
• Aggressively grew retained earnings
• Maintained AAA, stable-outlook rating
• Introduced new advances products
• Completed SEC registration process
Total Assets
(yearend)
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Advances
(yearend)
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MPF Balances
(yearend)
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Net Income
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Return on Equity
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Looking Ahead
2006-2007
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Retained Earnings
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National Issues
• Proposed capital rule and retained earnings
• GSE regulatory reform
• Director appointments
Finance Board’s Proposed
Capital Regulation
• Establish uniform minimum retained earnings of $50 million plus 1% of non-advance assets
• Limit dividends to no more than 50% of net income until retained-earnings minimum reached
• Restrict future dividend payment if retained-earnings level drops below minimum
• Prohibit payment of dividends until after close of quarter and earnings calculation
• Eliminate dividend payments in the form of capital stock
• Cap excess capital stock to 1% of total assets
Potential Effects of
Proposed Rule
• Sharply increased retained earnings required
• Smaller dividends
• Mortgage program slowdown
Misconceptions
• FALSE: Regulation would cut dividends in half until retained-earnings goal is attained
• TRUE: Proposed regulation would authorize FHLBanks to pay up to 50% of net income as dividends until retained-earning goals attained
• Bank paid 71% of net income in dividends in 2005
Pro Forma Base Case —
12/31/05 Data
• Assets: $57.7 billion
• Advances: $38.1 billion
• 2005 non-advance assets: $19.6 billion
• Retained-earnings minimum: $246 million
• 2005 actual retained earnings: $135.1 million
• Shortfall: $111 million
• 2005 earnings: $135.3 million
• 50% of $135.3 million = $67.6 million
• 2005 paid $96 million in dividends
One Strategy for Compliance
Assuming Regulation Effective January 1, 2007
• Staying the course
• No change in business strategy
• Same asset levels
• Dividends: 2006 (LIBOR + 50-70 bps)
2007 (LIBOR – 174 bps)
• Compliance and full dividend during Q1 2008
Alternative Strategy #1:
Current Dividend Level until Reg. Effective
(assuming regulation effective January 1, 2007)
• Balance-sheet reduction
• Reduced non-advance assets would shrink retained-earnings requirement and reduce earnings
• Reduce low-yielding money-market portfolio
• Sell AFS mortgage-backed securities
• Allow remaining MBS portfolio to run off
• Limit future MPF purchases
• Reduce excess stock
• Dividends: 2006 (LIBOR + 50-70 bps)
2007 (LIBOR – 105 bps)
• Compliance and full dividend in Q4 2007
Alternative Strategy #2:
Reduced Dividend beginning 2006
(assuming regulation effective January 1, 2007)
• Balance-sheet reduction
• Reduce low-yielding money-market portfolio
• Sell AFS mortgage-backed securities
• Allow remaining MBS portfolio to run off
• Limit future MPF purchases
• Reduce excess stock
• Dividends: 2006 (LIBOR + 14 bps)
2007 (LIBOR – 13 bps)
• Compliance and full dividend in Q2 2007
Possible Enhancements
to Proposed Regulation
• Increase percentage of net income FHLBanks may pay on dividends and allow longer period to achieve
• Make retained-earnings requirement risk-based
• Remove liquidity assets from formula
• Allow stock dividends
• Raise or eliminate cap on excess stock
GSE Legislative Update
• House and Senate Banking Committee passed bills in 2005
• Bush Administration and Federal Reserve consider House version too weak
• Major issue concerns capping Fannie’s and Freddie’s retained portfolios; affordable-housing fund also an issue
• Reports by OFHEO, SEC, Justice, and Rudman may spur momentum toward passage in 2006
Director Appointments
• Bush Administration: No director appointments for GSEs
• Bank down from 8 to 2 appointed directors
• Terms expire December 2006
• Source of expertise
• Addressed in Senate GSE bill, but House bill status quo
• New rule proposed by Finance Board
73rd Annual Shareholders Meeting
Federal Home Loan Bank of Boston
April 19, 2006
[LOGO]