Laddering Funds for Commercial Real Estate Loans

last updated on Thursday, May 14, 2020 in Advances

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Central State Bank began operating in 1931 in Elkader, Iowa. Today, Central State Bank serves customers from six different locations in Eastern Iowa, separated into significantly different markets. The northern market is well diversified focused on ag, commercial and consumer services, while the southern market is primarily commercial banking.


"If you're in need of funding, FHLB Des Moines is a really easy outlet."

Central State Bank's commercial real estate customers represent a wide mix of business ventures, including multi-family housing, retail and warehousing. With the customer demand and risk involved with large volume commercial real estate lending, Central State Bank's goal is finding funding at the terms that will work for everyone. "The whole banking industry is facing margin compression," explained Neil Havlik, Executive Vice President. "All of us are expecting rates to rise over the long term, so our goal is to protect and manage interest rate risk. So far we've been pretty successful." Havlik said their commercial customers have options to choose from in the marketplace. "Other banks are willing to do longer-term financing. Using FHLB Des Moines allows us to compete for that business." When a borrower with a lengthy history approached Central State Bank, they did not want to hedge out to 10 years, confident that the deal will not need to go all the way. Central State Bank requested a $3 million advance from FHLB Des Moines to cover the 10-year commercial real estate deal.


Central State Bank took down 5-year and 6-year amortizing advances from FHLB Des Moines. The bank laddered the two $1.5 million advances with different durations. The solution came as a result of working with their relationship manager on several scenarios based on fund modeling. "FHLB Des Moines allows us to know what we're getting from the beginning. Financial modeling is something we don't get anywhere else," pointed out Havlik. "Their modeling shows us whatever we want to do. With a few tweaks, we can maximize our returns."


While the fixed-rate, fixed-term bullet advance provided less interest rate risk protection in this scenario, Central State Bank was able to maximize the return at a spread it was comfortable with. Being able to fulfill commercial real estate loan applications has enabled Central State Bank to grow by attracting new business and deepening relationships with key customers. Havlik said it is a great opportunity for the bank. "We are able to offer longer-term financing. It's a good arrow in our quiver."

What's Next

Havlik says they will continue to turn to FHLB Des Moines for solutions, "When we are not in a liquid situation, we are able to use FHLB Des Moines." Central State Bank has relied on FHLB Des Moines as an "avenue of funding" in many situations, including a mix of brokered deposits and CD specials. What is the greatest advantage of partnering with FHLB Des Moines? "Speed and ease of use," said Havlik. "I can call and have the money we need in two minutes if I want. All the resources are online, or just a phone call away." Havlik said the convenience of FHLB Des Moines makes all the difference for Central State Bank. "I can get funds cheaper somewhere else, but with FHLB Des Moines I know it's going to be easier and faster. That's worth a few bps to me."

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