FHLBInsider

By James B. Eibel, CFA, vice president and marketing representative, and Patricia A. Gamble-Moore, vice president and community development representative.

"If you think nobody cares if you are alive, try missing a couple of car payments."—Earl Wilson (1907-87) American humorist

Question: What do car dealerships, a medical complex and municipal bonds all have in common?

Answer: They all represent assets that can be funded at below market rates with Community Investment Program (CIP) funding.

The Federal Home Loan Bank of Indianapolis (FHLBI) isn’t just about housing. The FHLBI’s Community Investment Program (CIP) was designed to encourage the funding of community and economic development projects. Every year, the FHLBI designates a target amount of funds at its cost for the CIP. Community Investment Program funding can be structured as either variable or fixed rate, with terms as long as 20 years, and with a variety of amortizations. The majority of CIP projects could be classified into one or more of the following categories:

• Commercial loans that create or retain jobs,
• Commercial loans that benefit low to moderate income areas,
• Infrastructure improvements, and
• Low- to moderate-income community housing.

Most FHLBI members fund projects every week that would qualify under CIP’s broad guidelines. However as of year-end 1999, only 15% of FHLBI members had CIP advances outstanding. Given that CIP advances are typically priced 0.25%-0.30% below comparable FHLBI funding, many have been missing a golden opportunity to reduce their funding costs.

The combination of a lower cost structure and the ability to offer a variety of terms (up to 20 year fixed rates) makes CIP a powerful tool for community bankers. Low cost, long term CIP funding has enabled many FHLBI members to differentiate their offerings in competitive bidding situations. Also, the same factors can be the difference in making certain community and economic development loans viable. This issue of the Insider highlights a few of the many CIP success stories.

The fire, the Ford dealership, and fixed rates

On February 11, 1997, a fire completely destroyed the Town and Country Ford dealership in Kingsford, Mich. Rather than simply rebuild the facility, the owner decided to double its size. The proposed project would both retain existing jobs and add new ones. First National Bank of Iron Mountain was one of several institutions approached with the loan proposal.

According to Gene Whippler, senior vice president at First National Bank, "CIP helped us get the loan in a competitive situation. We were able to offer the customer a 20 year fixed rate loan when everybody else was pushing short-term fixed or variable rates. We were able to match fund the loan with a 20 year CIP advance, so we didn’t take any interest rate risk on the deal. Also, the application process had very little paper work and we got our approval fast. It was one of the easiest things I’ve ever done. We continue to look for opportunities to use the program."

CIP and practicing good medicine

CIP funding is ideal for funding loans to exceed the requirements of the Community Reinvestment Act. Chemical Bank & Trust’s funding of the MidMichigan Urgent Care medical facility expansion is an example.

The MidMichigan Urgent Care facility in Midland, Mich., was initially designed to accommodate 75 patients per day. However, the area’s high demand for medical services forced the facility to accept as many as 100 patients a day. Chemical Bank & Trust was approached with a proposal to expand the facility by adding three operating rooms and increasing staffing levels.

According to Steve Hallead, assistant vice president of Chemical Bank & Trust, "The Community Investment Program enabled us to vie for a highly competitive project. Without the program, it would have been difficult to compete for the loan. We were able to offer the customer a long term fixed rate loan that otherwise would not have been possible. The Community Investment staff made the process expeditious and effortless. The quick turnaround time enabled us to put forth a competitive bid in a timely manner."

Municipal bonds and portfolio management

When the city of Marion, Ind., decided to float general obligation bonds to fund a community facility, STAR Financial Bank saw an opportunity to use low-cost long term CIP funds to help its community.

According to Steve Doan, vice president of STAR Financial Bank, "We wanted to participate in the renovation of the Marion Coliseum because it will benefit the youth of the community. Our ALCO looked at the CIP advance as an opportunity to lengthen our liability structure and reduce overall interest rate risk in an affordable manner. In the future we would certainly use CIP advances to fund worthy community projects."

The CIP application process

The CIP application process is short and simple. The two-page application is used to tell the story of how the proposed project will promote community or economic development. Minimal documentation is required. Most projects can be documented using the FHLBank’s internal geo-coding software. Low-income housing tax credit projects and projects that have received an Affordable Housing Program (AHP) award automatically qualify. All CIP applications are evaluated immediately upon receipt and funds are disbursed on a first come, first served basis. Commitments are usually given within seven to ten days. Underwriting, prepayment, and collateral requirements are consistent with those on all FHLBI credit programs. It's important to know that only a limited amount of CIP funds are available each year.

If you have any questions about or would like to apply for CIP funding, please contact Pat Gamble-Moore at (317) 465-0368.

This article has been presented for educational purposes only.  The FHLBI is not a financial or investment advisor.   It is solely the reader's responsibility to evaluate the risk and merits of any funding strategy or business proposal.

Copyright 1999, Federal Home Loan Bank of Indianapolis