The FDIC recently reported that commercial banks and savings institutions reported record earnings for the first quarter of 2005. The report contained both good and bad news. The good news was the absence of merger-related expenses and a reduction in expenses for bad loans. A decline in net operating revenue (net interest income plus total noninterest income) was troubling. A flattening yield curve contributed to the industry's net interest margin dropping to a 15-year low of 3.54 percent, down nine basis points from the fourth quarter of 2004. Net interest income was $435 million lower than in the prior quarter.

Mortgage demand remained strong as mortgage related assets increased by 2.9 percent during the quarter. Members wanting to increase net interest income could consider originating 15-year mortgages and using Federal Home Loan Bank of Boston advances as the funding source.

Our model shows 15-year mortgages with a coupon of 5.375 percent funded with 16 percent each of one-month, one-year, two-year, three-year, and four-year advances, and 20 percent of five-year advances. The initial funding cost is 4.23 percent, and the initial spread is 1.15 percent. Within a range of rate scenarios from -50 basis points to +300 basis points, you could expect a positive contribution to net interest income during years one through seven. Members with leverage capacity could consider this a strategy to bolster their net interest income.

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