With loan demand soft in many New England communities, members with the ability to grow and the need for earnings are increasingly looking to the wholesale markets to generate additional earnings. Local economic conditions recently prompted one member to purchase a 15-year, 4 percent mortgage-backed security (MBS) and use Federal Home Loan Bank of Boston advances to fund it.

Purchased at a discount, the security yields 4.64 percent in the base case with an average life of 4.8 years. Twenty percent of the funding utilized is a four-year Classic (bullet) advance priced at 3.38 percent, while the remainder is a five-year/five-year Amortizing advance at 3.02 percent. The funding cost is 3.10 percent, leaving the member with a spread of 1.55 percent.

The Strategy
Our model shows the results in seven rate environments for years one through seven. This strategy gives the member some interest-rate-risk protection should rates move in either direction. The spread would be about 100 basis points if rates rise 300 basis points and increase slightly to 164 basis points if rates fall 50 basis points.

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.