When Kent Redfern, President of Litchfield, Illinois-based Bank & Trust Company was given the opportunity by a customer to match the terms offered by a much larger competitor, he was faced with an immediate need to expand his resources in order to deliver a solution. Kent’s customer, a farmer with enormous land value, had been approached with an attractive, long-term, fixed-rate deal.
Prior to this point, the Bank & Trust Company had offered ARMs and 3- and 5-year balloon loans as solutions. “This worked well for us,” Kent related, “until larger banks and financial institutions were out marketing long-term fixed products.” For the Bank & Trust, a community bank with $260 million in assets, providing a long-term loan presented an obstacle.
“It put us in a quandary because we could not incur interest-rate risk.” How could the Bank & Trust make long-term, fixed-rate loans without changing its approach to balance sheet management? Could the bank safely make a long-term farm real-estate loan and compete with larger banks and other lenders?
Kent decided to explore possible funding options with the FHLBC and contacted Sales Director Chris Milne. In their opening discussions they identified two strategies: 1) Sell the loans to one of the insurance companies marketing the long-term product; 2) Match-fund using advances and provide terms for the borrower that featured an acceptable long-term period.
Together they launched an analysis. They estimated and calculated prepayment fees; they investigated how to plan for the fees and put them in the contract with the borrower. Their study revealed that, by using advances to match a first mortgage position and bank funds for a second mortgage position for a farm equity line of credit, they could craft a product paralleling or surpassing the offering of larger competitors.
The structure became a new product and an effective tool for asset liability management. For the Bank & Trust it matched cash flows, locked in a good spread, immunized the bank from interest rate risk, and provided coverage for prepayment risk. “We’ve had a second agreement, and now a third is in the works — it was not just a one-time deal,” Kent was pleased to report.
Consider partnering with the FHLBC to customize transactions that expand the products you offer to provide funding opportunities for your customers, and targeted income for your bank.