FHLB Boston
Advance Restructuring Solution
February 4, 2010
Kevin G. Martin
Vice President Member Services
617-292-9644
kevin.martin@fhlbboston.com
Federal Home Loan Bank of Boston
Members should not construe the information contained in this
Webinar as accounting, business, legal, or tax advice from FHLB
Boston. Members should consult with their own independent
accounting, business, legal, and tax advisers with respect to
restructured advances. Members should refrain from entering into
restructured advances unless they have first consulted with their
internal/external accountants and/or auditors regarding the
appropriate accounting treatment for any transaction involving
advance restructurings. This information does not constitute an
offer to engage in any transaction.
Federal Home Loan Bank of Boston
2
Agenda
ƒ Description of an advance restructuring
ƒ Eligible advance products
ƒ Benefits to your institution
ƒ EITF 96-19
ƒ What’s working
ƒ How to restructure an advance
ƒ Questions
Federal Home Loan Bank of Boston
3
Description of Advance Restructuring
ƒ Allows members to blend the prepayment fee of an existing
advance into the rate on a new advance
ƒ No cash settlement of the prepayment fee will be required
ƒ Old advance is closed out and a new advance is initiated
Š Accrued interest on old advance is due when the new advance
settles
Federal Home Loan Bank of Boston
4
Eligible Advance Products
ƒ Old advance can be:
Š Long-term Classic advance
Š Amortizing advance
• Housing & Community Investment equivalents of the above
ƒ Can only restructure into Long-term Classic advance
Š Must be for same dollar amount as the old advance
Š Can not go into long-term specials and CDA
• To take advantage of these programs, the prepayment fee must be
cash settled
Š Percent of Assets Incentive Discount (PAID) program will apply
Federal Home Loan Bank of Boston
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Benefits to Your Institution
ƒ
Allows liability sensitive members to extend duration of advances without
increasing total advances outstanding
ƒ
May result in a lower cost on new advance compared to the old advance
ƒ
Improved NIM
ƒ
Members can grow capital faster than by holding old advances at higher rates
ƒ
If the restructure qualifies as a “modification” the ongoing accounting is
cleaner
Š No discount is booked relating to the new advance
Š Ongoing interest expense is the coupon of the new advance
ƒ
Strip out optionality from HLB Option advances (cash settle)
ƒ
Lock-in today’s low rates
Federal Home Loan Bank of Boston
6
EITF 96-19 — Debtor's Accounting for a
Modification of Debt Instruments
ƒ You must determine how to account for the prepay fee if an advance
is prepaid and a new advance is taken down
Š Applies whether you “Blend” (Advance Restructure) or “Cash Settle”
prepay fee
ƒ Is there a SUBSTANTIAL difference between the old and new debt
ƒ Compare the PV of the old debt and the new debt
Š The coupon rate of the old advance is used as the discount rate to
calculate the PVs
Members should not construe the information contained in this Webinar as accounting advice from FHLB Boston. Members
should consult with their own independent accounting advisers with respect to restructured advances.
Federal Home Loan Bank of Boston
7
EITF 96-19 — Debtor's Accounting for a
Modification of Debt Instruments
ƒ Accounting treatment of prepay fee differs between “extinguishment”
or “modification”
Š Extinguishment – PVs differ by 10% or more - SUBSTANTIAL
• Prepay fee booked as one-time loss
• New advance on books at current coupon
Š Modification - PVs differ by less than 10% - not substantial
• Prepay fee accreted over term to maturity of new advance
• Expense on new advance is current coupon plus the accretion of the prepay
fee
Members should not construe the information contained in this Webinar as accounting advice from FHLB Boston. Members
should consult with their own independent accounting advisers with respect to restructured advances.
Federal Home Loan Bank of Boston
8
EITF 96-19 — Considerations
ƒ Review the transaction with your internal and external accountants
and auditors
Š Be certain you will get the accounting treatment you want, i.e.
modification or extinguishment
Federal Home Loan Bank of Boston
9
Restructure Advance
Determine Accounting Treatment
Perform PV 10% Test
Difference in PVs 10% or Greater
Extinguishment
Cash Settle
Book prepay fee as
one-time loss.
Carry new advance at
new (posted) advance
rate.
Blend
Should be Cash settled.
Difference in PVs Less than 10%
Modification
Cash Settle
Prepay fee must be
accreted over term of new
advance.
Blend
Prepay fee is not cash
settled.
New advance carried at
current (posted) rate.
Prepay fee incorporated
into coupon on new
advance which will be
higher than posted rate.
Total expense is
accretion of prepay fee
plus coupon of new
advance.
Total expense is coupon of
new advance. No prepay
fee to accrete.
Members should not construe the information contained in this Webinar as accounting advice from FHLB Boston. Members
should consult with their own independent accounting advisers with respect to restructured advances.
Federal Home Loan Bank of Boston
10
EITF 96-19: 10% Test
ƒ Use the coupon rate of the OLD advance to calculate the PV of
the NEW advance
ƒ Cash flows include monthly interest and principal payment
ƒ If prepay fee on advance is cash settled – remember to include
this as a period 0 cash flow
Federal Home Loan Bank of Boston
11
EITF 96-19: 10% Test – Blended Prepay Fee
T o d a y 's D a t e
P re p a y F e e :
A dv an c e N u m ber
M a t u ri t y D a t e
A d v an c e R ate
A dvance A m ount
P re p a y F e e $
2/2/2010
BLEN D ED
123456
2/28/2011
5 .4 5
1 0 ,0 0 0 ,0 0 0 .0 0
5 7 0 ,3 2 5 .7 9
M o n t h s t o M a t u rit y
P re p a y F e e a s % o f A d v B a l
P rin t
1 2 .8 7
5 .7 0
T e rm (Y rs )
Po s ted R ate
S p re a d
Blen d ed R ate
Blen d ed R ate
O v e r (U n d e r)
O ld A d v R ate
PV of N ew
A dvanc e
E x ten s io n
in M o n th s
M a t u rit y
D ate o f N ew
A dvance
2 .0 0
2 .2 5
2 .5 0
2 .7 5
3 .0 0
3 .5 0
4 .0 0
4 .5 0
5 .0 0
5 .5 0
6 .0 0
6 .5 0
7 .0 0
1 .2 7
1 .4 5
1 .6 2
1 .8 0
1 .9 8
2 .2 5
2 .5 2
2 .7 6
3 .0 1
3 .2 3
3 .4 6
3 .6 6
3 .8 5
2 .8 9
2 .5 8
2 .3 3
2 .1 3
1 .9 6
1 .7 0
1 .5 1
1 .3 5
1 .2 4
1 .1 4
1 .0 6
0 .9 9
0 .9 4
4 .1 6
4 .0 3
3 .9 5
3 .9 3
3 .9 4
3 .9 5
4 .0 3
4 .1 1
4 .2 5
4 .3 7
4 .5 2
4 .6 5
4 .7 9
(1 .2 9 )
(1 .4 2 )
(1 .5 0 )
(1 .5 2 )
(1 .5 1 )
(1 .5 0 )
(1 .4 2 )
(1 .3 4 )
(1 .2 0 )
(1 .0 8 )
(0 .9 3 )
(0 .8 0 )
(0 .6 6 )
9 7 .5 6
9 7 .0 0
9 6 .5 0
9 6 .1 3
9 5 .8 3
9 5 .2 3
9 4 .9 1
9 4 .6 6
9 4 .7 6
9 4 .8 8
9 5 .2 5
9 5 .6 3
9 6 .1 7
1 1 .1
1 4 .1
1 7 .1
2 0 .1
2 3 .1
2 9 .1
3 5 .1
4 1 .1
4 7 .1
5 3 .1
5 9 .1
6 5 .1
7 1 .1
2/2/2012
5/2/2012
8/2/2012
11/2/2012
2/2/2013
8/2/2013
2/2/2014
8/2/2014
2/2/2015
8/2/2015
2/2/2016
8/2/2016
2/2/2017
Federal Home Loan Bank of Boston
12
Example: Prepay fee BLENDED (from Slide 12)
Ol d A dv anc e
Advance Rate
Advance Amount
Prepay Fee $
Prepay Fee as % of Adv Bal
New 4-year posted rate
5.45
10,000,000.00
570,325.79
5.70
2.52
S pread
PV o f new adv anc e
Us e Ex c el PMT (pay ment) f unc t i on o r hp 12C
Us e Exc el PV (pres ent v al ue) f unc t i o n or hp 12C
Rate (2.52 / 12)
Nper (4 * 12)
Pv
Fv
Rate (5.45 / 12)
Nper (4 * 12)
Pmt ($10M * 4.03 / 12)
Fv
Result
Multiply by 12
Roundup
Add to posted rate
Blended rate on new advance
Federal Home Loan Bank of Boston
0.0021
48
-5.703
0
0.12503
1.50036
1.51
2.52
4.03
Result
Divide by 10M
0.0045
48
-33,583.33
-10,000,000.00
9,490,682.25
94.91
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What’s Working
Prepaid Advances
Balance
2,500,000.00
5,000,000.00
10,000,000.00
5,000,000.00
5,000,000.00
15,000,000.00
7,500,000.00
3,500,000.00
2,000,000.00
1,000,000.00
1,000,000.00
1,000,000.00
10,000,000.00
7,000,000.00
5,000,000.00
5,000,000.00
7,000,000.00
7,000,000.00
10,000,000.00
20,000,000.00
10,000,000.00
Adv Rate
3.99%
5.01%
5.19%
4.68%
4.48%
4.11%
3.79%
4.86%
4.83%
4.81%
4.57%
4.55%
5.03%
3.75%
3.82%
4.82%
4.79%
5.06%
5.45%
4.76%
5.05%
Federal Home Loan Bank of Boston
New Advances
Months to
Prepay Fee %
Maturity
15.2
15.9
30.7
20.0
22.1
16.8
16.6
9.4
2.1
7.3
13.5
8.2
11.8
4.7
18.5
12.3
13.0
13.0
13.0
13.8
15.4
4.33
5.80
9.52
6.39
6.50
4.82
4.34
3.58
0.83
2.80
4.59
2.95
4.58
1.39
4.77
4.83
5.00
5.28
5.70
5.17
6.07
Yrs to Mat
Adv Rate
2.75
3.50
4.00
3.50
3.50
2.75
2.50
5.00
5.00
5.00
5.00
5.00
5.00
4.00
3.00
4.50
4.50
4.50
4.50
4.50
4.50
1.86%
2.31%
2.57%
2.31%
2.31%
1.86%
1.68%
3.07%
3.07%
3.07%
3.07%
3.07%
3.07%
2.62%
2.04%
2.83%
2.83%
2.83%
2.83%
2.83%
2.83%
Blended
Blended Rate
Price of new
Rate of New
vs. prepaid
advance
Advance
advance
3.48%
98.68
(0.51)%
4.04%
96.90
(0.97)%
5.08%
99.60
(0.11)%
4.22%
98.52
(0.46)%
4.25%
99.26
(0.23)%
3.67%
98.86
(0.44)%
3.46%
99.22
(0.33)%
3.85%
95.54
(1.01)%
3.25%
93.02
(1.58)%
3.68%
95.00
(1.13)%
4.07%
97.78
(0.50)%
3.71%
96.26
(0.84)%
4.07%
95.78
(0.96)%
3.00%
97.23
(0.75)%
3.69%
99.63
(0.13)%
3.98%
96.83
(0.84)%
4.02%
97.10
(0.77)%
4.09%
96.36
(0.97)%
4.19%
95.31
(1.26)%
4.06%
97.40
(0.70)%
4.27%
97.18
(0.78)%
Extension
in Months
17.8
26.1
17.3
22.0
19.9
16.2
13.4
50.6
57.9
52.7
46.5
51.8
48.2
43.3
17.5
41.7
41.0
41.0
41.0
40.2
38.6
14
How to Restructure an Advance
ƒ Management determines objective of restructure and whether they
desire modification or extinguishment accounting treatment
ƒ Most likely – Modification, extend maturity, and lower coupon
Š Contact your Relationship Manager or Kevin Martin
Š We will attempt to identify advances that meet your objectives
ƒ Decide which advances you want to restructure
Š Call The Money Desk 1-800-357-3452
Š Give them the old advance # and the term of the new advance and they
will give you the new “blended” rate
ƒ Next-day settlement, if requested by 1:00 p.m.
Federal Home Loan Bank of Boston
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