Home sales have been a bright spot in the economy in recent years, and rates on 15-year mortgages are near where they were a year ago. If loan growth in your market remains viable but you lack the deposit growth to fund it, you might consider funding that growth with Federal Home Loan Bank of Boston advances. This strategy can help you generate earnings to offset both reduced margins and increased operating costs.

The Strategy
Our financial strategy model shows $5.0 million in 15-year fixed-rate mortgage loans at 5.125 percent funded 100 percent with a five-year amortizing advance at 3.940 percent, producing an initial spread of 1.180 percent.

The cost of the advance is fixed over time and the outstanding amount is reduced as monthly principal and interest payments are made. Any additional funding required is tied to the one-month Bank advance rate (currently 2.60 percent) and increases or decreases evenly over a 12-month period based on the rate scenario.

The average cost of funds in the base case is 3.56 percent and increases to 4.72 percent in the up-300-basis-points scenario. Over a seven-year horizon, the five-year amortizer provides protection if rates rise, and allows you to adjust to a lower-rate environment if rates decline slightly (down 50 basis points).

In flat and rising-rate scenarios of 100 basis points, the spread widens from an initial spread of 118 basis points to 156 basis points and 126 basis points, respectively. The spread would be about 41 basis points if rates were to rise 300 basis points over the next year and then remain unchanged.

Please contact our financial strategists at strategies@fhlbboston.com or 1-800-357-3452 to examine other funding alternatives for this or other loans and investments. When considering any strategy, you should always consider your institution's overall balance-sheet-sensitivity position.