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New uses and structure for Federal Home Loan

Bank Letters of Credit can help communities by


providing credit enhancements for tax-exempt
bonds and improve cost of capital.

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LC Structure, Usage, Benefits

AGENDA
Overview
Introduction of Presenters
Doug Iverson Denise Yvette Barkdull
Senior VP Partner
Director of Marketing, FHLBI Ice Miller

Mark Pascarella Steven Kennedy, Jr.


Lending Officer, FHLBI Vice President
Lancaster Pollard

Thomas Peterson
Partner
Ice Miller

Swiss Village Overview


Questions & Answers
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Arthur and Gloria Muselman Wellness Pavilion
Swiss Village, Berne, Indiana

About Swiss Village


• Opened in 1968
• Continuing care facility offering independent living to
full nursing home care with many on-site services such
as banking, barber and beauty shops, and library
• 350 residents; 340 employees

About the Pavilion


• Named after a couple who were active residents of
Swiss Village and supporters of the wellness program
• 21,200 square feet, aquatic center, child care, kitchen
• Exercise room which can also be rented by public
for events such as receptions and club meetings
• Pavilion used by both residents and community.
Community pays membership fee which is used to
cover operation costs
• Opened January 2009
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Arthur and Gloria Muselman Wellness Pavilion
Swiss Village, Berne, Indiana

Funding
• A pledge drive has raised $3.7 million to date.
Goal is $4 million.
• FHLBI letters of credit to support bond issuance
> First Bank of Berne - $4.8 million
> Bank of Geneva - $2.2 million
• Investment bank - Lancaster Pollard & Co.,
Columbus, OH

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Standby Letters of Credit

About FHLBank Standby Letters of Credit


• Issued on behalf of FHLBI member institutions
• Cost effective way to improve credit rating of
transaction and/or to provide credit enhancement
• On July 30, 2008, Housing and Economic
Recovery Act of 2008 (HERA) signed into law
permitting FHLBanks to issue LCs to back
tax-exempt, non-housing bonds
> LC legislation championed by
Rep. Sander Levin (D-MI)
• This expanded authority set to expire on
December 31, 2010

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Standby Letters of Credit

FHLBI can issue LCs to assist members with


• Residential housing finance
• Community lending eligible for FHLBI’s
Community Investment Program
• Asset/liability management
• Liquidity or other funding

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Standby Letters of Credit

Types of Standby LCs


• Traditional Standby: FHLBI guarantees payment to
beneficiary on behalf of member
• Confirming: Member issues an LC that is
guaranteed by FHLBI
• Direct Pay: FHLBI is drawn on directly by beneficiary
to make recurring payments, typically part of a
bond financing

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Standby Letters of Credit

Standard Fees
• Standby, Confirming, and Direct Pay:
37.5 BPS annually, beginning with settlement date
• Community Investment Program (CICA):
20 BPS annually, beginning with settlement date
• Transaction Fee of $50 for all draws
• If FHLBI uses outside counsel, fee to be paid by member
• Early termination fee of up to $5,000 may apply

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Standby Letters of Credit

On the Regulatory Front:


• Regulator has been asked by another FHLBanks to clarify
if new authority under HERA must also qualify for Community
Investment Program (CIP)
• To date we have not received an opinion from
our regulator
• If the regulator were to require project to meet CIP
criteria, one of the following conditions would have to be met:
> Housing projects for households up to 115% AMI
> Projects creating or preserving jobs
> Small business loans
> Projects providing services to a qualified area
> Income limits do not apply to projects in eligible areas
(empowerment zones, brownfields, enterprise communities)

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Standby Letters of Credit

Other Specifications
• Standby LCs limited to maximum term of 20 years
• Member must collateralize total amount of Standby LCs
and includes Standby LCs in calculating a member’s
capital stock requirement.

For more information, please call


Mark Pascarella, Lending Officer
317.465.0457
or
Brian McCoy, VP, Advances Manager
317.465.0503

The FHLBI is not a financial, investment, or tax advisor and does not make any
representations as to such regarding the use of Standby LC. It is the member’s
sole responsibility to research the legal ramifications of using FHLBI Standby LC
and the effect it may have on the taxable status of a bond issuance.

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Tax-exempt Bonds & How They Work

Role of Federal Home Loan Bank


• Borrower contracts with bank to provide an LC
guaranteeing payment on bonds
• With LC, bonds are marketable because bondholder relies
solely on credit of bank providing the LC
• FHLBank can offer any member an LC using
FHLBank’s high credit rating

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Role of the Federal Home Loan Bank

Role of Federal Home Loan Bank continued


• FHLBank’s LC to secure bonds will provide
> Ready access to bond market
> Higher credit rating (and therefore lower interest rate)
than member can achieve on its own credit
• Member and Borrower enter into credit
(or reimbursement) agreement
> Borrower agrees to reimburse member for any
payment made on bonds
> Member takes security and places any necessary
financial and debt restrictions on borrower

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Role of the Federal Home Loan Bank

Is this program new?


• No, but recent federal legislation expanded the use
of the FHLBank LCs
• Historically, the FHLBanks could provide LCs only
for bonds issued to finance acquisition or construction
of multifamily housing
• FHLBanks now authorized to issue LCs to support
all varieties of tax-exempt bonds

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Tax-exempt Bonds & How They Work

Who can use Tax-exempt Bonds?


• Traditionally, tax-exempt bonds may be issued
to finance capital costs of acquisition, construction
and equipping of
> manufacturing facilities
> solid waste disposal facilities (or portions of facilities
dealing with the solid waste produced by a facility)
> multifamily rental housing facilities
• Recently enacted Federal Stimulus Bill changes all the rules

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Tax-exempt Bonds & How They Work

The New “Who”


• Essentially, any business enterprise can qualify for
tax-exempt borrowing to fund capital expenditures
> Recovery Zone Facility Bonds
> $15 billion authorized to be issued nationwide
> Allocated to states and suballocated to counties/large
municipalities based on job losses
> Each state to receive a minimum of $135 million
• Manufacturing definition expanded — now covers intangibles
• Heartland Disaster Bonds - $3.2 billion to Indiana as a result
of the flooding in Spring 2008
> Any business that suffered a “loss” is eligible

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Tax-exempt Bonds & How They Work

How Do Bonds Work?


• Tax-exempt bonds issued by governmental entity,
such as city, town or county or by statewide entity
such as Indiana Finance Authority ("Issuer"), the
Michigan State Housing Development Authority or any
other statewide issuer"
• Bonds sold to market through underwriter or
placement agent
• Proceeds of bonds then lent to borrowing entity ("Borrower")
for use on capital expenditures for qualifying project

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Tax-exempt Bonds & How They Work

How a letter of credit works.

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Tax-exempt Bonds & How They Work

If you have a potential project and would


like to discuss its eligibility, contact:

Denise Barkdull
denise.barkdull@icemiller.com
317-236-5803

Thomas Peterson
thomas.peterson@icemiller.com
317-236-2494

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LC Benefits, & Observations

Benefits to FHLBank Members


• Community investment – Provides opportunity for
local financial institutions to invest directly into
community-based projects
• New business opportunity – Enables local institutions to
provide clients access to AAA-rated tax-exempt capital;
places them on more level playing field with larger,
rated institutions
• Retain and grow local business relationship – Mitigates risk
associated with larger institution providing debt capital; as a
result taking over depository and other ancillary services

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LC Benefits, & Observations

Benefits to FHLBank Borrowers


• Maintain and strengthen local banking relationships –
Clients can access AAA- rated tax-exempt capital via local
relationships, ensuring continuity with local contact
• Community investment – borrower’s LC fee is staying
local, rather than leaving community to non-local institution

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LC Benefits, & Observations

General Observations
• Members lending limit restrictions may be overcome
by including multiple members in deal
• If multiple members involved, one “lead” member is
key to structuring efficiencies
• AAA-rated FHLBank LC is trading extremely well in
today’s financial markets; enhanced interest in
“flight to quality” financial environment
• Collateral posting requirements appear to be primary
deterrent to members using LCs

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Biographies

Name: Denise Yvette Barkdull


Position: Partner
Location: Indianapolis Office
Phone: (317) 236-5803
Fax: (317) 236-5819
E-Mail: denise.barkdull@icemiller.com

Assistant Name: Corinne Cook-Oliver


Assistant Phone: (317) 236-2215
Assistant E-Mail: corinne.oliver@icemiller.com

Undergraduate School:
Bachelor of Business Administration in Finance, Boise State University, Graduated in 1994

Graduate School:
Master of Business Administration, Indiana University Kelley School of Business,
Graduated in 1997

Law School:
Indiana University School of Law – Bloomington, Graduated in 1997

Admitted to Practice:
Indiana

Mini Biography:
Denise Barkdull assists state and local governments with taxable and tax exempt
financings for direct governmental purposes, as well as economic development within
their region. Ms. Barkdull provides counsel for, among other things, airports, solid
waste disposal facilities, single family and multi-family housing, municipal gas utilities
and manufacturing facilities. 22
Biographies

Name: Thomas W. Peterson


Position: Partner
Location: Indianapolis Office
Phone: (317) 236-2494
Fax: (317) 592-4731
E-Mail: thomas.peterson@icemiller.com

Assistant Name: Jan Gluth


Assistant Phone: (317) 236-2254
Assistant E-Mail: janice.gluth@icemiller.com

Undergraduate School:
University Diploma, with high honors, Darwin College, University of Kent,
Canterbury,England, Graduated in 1982

A.B in Economics, Duke University, Graduated in 1983

Law School:
Duke University, Graduated in 1986

Mini Biography:
Thomas Peterson has served as bond counsel to state and local governments
for over 22 years. Mr. Peterson has also served as special counsel to the Federal Home
Loan Bank of Indianapolis in the development of their Letter of Credit program.

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Biographies

Steven W. Kennedy Jr., Vice President, is Lancaster Pollard’s investment


banker in charge of Indiana and Illinois. Lancaster Pollard is a national
investment banking and financial services firm that specializes in
providing capital funding and financial advisory services to the health
care, senior living, affordable housing and private education sectors. In
addition to underwriting tax-exempt bond offerings, Lancaster Pollard
provides organizations a complete range of funding options through its
FHA/GNMA/USDA/FNMA-approved mortgage lender subsidiary.

Since joining Lancaster Pollard in 2001, Mr. Kennedy has devoted 100% of
his efforts to providing health care organizations with financial advisory
and capital funding solutions. He has been instrumental in bringing to
market a variety of financing structures totaling in excess of $500 million
and was named Lancaster Pollard’s National Healthcare Banker of the
Year in 2007. Prior to joining Lancaster Pollard, Mr. Kennedy worked for
United States Senator Richard G. Lugar (Indiana) in Washington D.C.

Mr. Kennedy earned his MBA from the Fisher College of Business at The
Ohio State University in Columbus, Ohio. He received bachelor degrees
(magna cum laude) in economics and political science and a certificate in
organizational studies from Denison University in Granville, Ohio. He
holds a General Securities Representative license, Series 7, and is a
frequent speaker on capital funding for community health care providers.

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