Funding Strategies: Using Community Investment Advances to “Double-Dip the Chip”

last updated on Friday, January 26, 2024 in Advances

In a famous 1993 “Seinfeld” episode, the character George Costanza faces an awkward moment in which a fellow party guest accuses him of “double-dipping” a chip. While the act of double-dipping in this instance is a flagrant transgression, there are situations in which double-dipping can represent a strong benefit to both communities and balance sheets! Enter the FHLB Des Moines Community Investment Advance (“CIA”) program that offers members a reduced rate on eligible advances whose terms can range from one-to-30-years. Application of CIA drawn by members can take many forms: downtown revitalization, employment stability, rural broadband expansion, brownfield development, infrastructure, targeted affordable housing projects and more. Many members of FHLB Des Moines are already active in supporting these types of efforts through their day-to-day community lending and investing activities.

Eligible Loans and Investments:

CIAs may be classified as either: 1) Commercial Lending Advances or 2) Residential Lending Advances. CIAs may be taken to support direct loans, purchased loan participations, and the purchase of mortgage revenue bonds or mortgage-backed securities; provided all of the loans purchased or financed by such bonds or securities can be shown to meet the eligibility requirements of the CIA product.

Here’s a synopsis of the types of loans that typically qualify for the two advances: 

Commercial Lending Advances:

• A loan to a small business or farm will qualify, per standards established by the Small Business Administration.
• Direct or participation loans that fund: i) commercial, mixed-use or agricultural loans from targeted areas or ii) those that fund small businesses
• Municipal bonds that fund public facilities and infrastructure project
• Commercial, mixed-use and agricultural loans originated by a member

Loans may be new originations or refinancings of existing loans. Eligible loans include those that: i) fund the acquisition or expansion of a business, ii) real estate loans for purchase, construction or renovations, iii) equipment and vehicle loans, iv) livestock loans and v) loans for working capital and inventory.

Common qualifiers for the Commercial Lending CIA Program are the small business standard in urban areas and target income parameters for rural areas.

Residential Lending Advances:

• Newly-originated or refinanced loans that fund single or multi-family units or manufactured housing projects
• One-to-four-unit mortgages that are sold in the secondary market are permitted, including FNMA DUS bonds that fund projects in targeted census areas
• Owned home loans or rental projects that target low-to-medium households (up to 115 percent area median income), measured either by target lending area or target income level
• Financing for Native American Housing Assistance, Alaska Native or Native Hawaiian Homeland projects (commercial and residential)

CIA Product Logistics:

The qualification process is easy. At the time a CIA is requested, the member provides summary information to the FHLB Des Moines Community Investment Department about the loans or investments that have or will be funded. Loans must have been originated and funded within the three months prior to the date of the CIA, or a member may take an advance on loans to be originated and funded within the 12 months after date of the advance. The latter alternative is useful to accommodate new construction projects, loans or lines of credit for working capital. Only the funded amount of a loan is eligible for CIAs. For added flexibility and duration-certainty, should the funded loan or investment be terminated or prepaid before the CIA matures, that CIA is not required to be terminated.

There are a few other features to be aware of:

• The maximum outstanding CIA balance per member was recently doubled and increased to $20 million.
• Minimum maturity of a CIA is one-year
• Minimum amount per advance is $25,000 and $100,000 for the Commercial and Residential Lending Programs, respectively
• CIA funding from FHLB Des Moines is available on an ongoing basis
• Identified loans used to qualify for CIAs are not collateral for the advance. Rather, a member’s existing collateral pool is pledged separately while an outstanding CIA would offset that collateral.

Reduced Rates and Balance Sheet Management Opportunities:

In addition to accessing funds for the benefits of affordable housing and community investment, CIAs are offered at rates that are consistently offered below posted regular term advance levels. Here is a recent rate comparison. As an example, on January 25, 2024 (Figure 1), CIA rates were 13 basis points below regular posted term advance levels. Plus, the positive impact of the cash dividend benefit derived from the FHLB Des Moines activity stock, yields an extremely competitive and duration-certain source of funding.

Figure 1 - Rate indications as of 1/25/2024

* The dividend adjusted rate is an approximation based off of our current stock requirement and current dividend payment. This is an approximation only. For alternative dividend adjusted calculations, please consider using our dividend calculator. These calculations are indications only.

Double-Dipping the Chip:

In addition to obtaining funds for providing affordable housing and community capital at a highly competitive rate, the fungible prepayment features of the CIA may be readily applied as a tool to assist a member’s balance sheet and interest risk mitigation strategy. As an example, if a member has sustained decreasing deposit durations and wishes to increase asset sensitivity, deploying low-cost term advances is an effective means of achieving this goal.

In many cases, FHLB Des Moines members are already originating residential, commercial, agriculture or small business loans in their regular course of operations. From a funding perspective, the path of least resistance, at least for the first $20 million, should always warrant the CIA. It’s profitable to the communities that your serve to “double-dip the chip.” Your FHLB Des Moines relationship manager would be glad to further walk you through the process.

About the Author

John Biestman, Senior Relationship Manager

John joined the Federal Home Loan Bank System in 2003 and is a highly regarded financial strategist, speaker and writer. John has more than 40 years of national and international financial experience, including leadership positions at Barclays Capital, First Interstate Bank and Dean Witter Reynolds. He holds a Master’s in business administration from the Johnson Graduate School of Management at Cornell University and a Bachelor’s in political science and economics from the University of California, Los Angeles. John is also a Chartered Financial Analyst (CFA).

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