How To Turn $70 Million A Night Into $12,000 A Month

KCT Credit Union shows how arbitrage through the Federal Home Loan Bank adds income where there was none.

Top-Level Takeaways

  • A Federal Home Loan Bank arbitrage program created to manage liquidity and risk also lets participants generate income.
  • Near nightly arbitrage deals generate $12,000 a month for Kane County Teachers Credit Union.

While the humans of Kane County Teachers Credit Union ($221.3M, Elgin, IL) sleep, their money is hard at work.

The suburban Chicago credit union makes approximately $12,000 a month through a Federal Home Loan Bank arbitrage program created to manage liquidity and risk that also lets participants generate income.

KCT borrows about $70 million at a time from the FHLB, typically overnight, puts the cash in a Fed account and makes a bit of cash each time from the spread. The margin is thin, but the transactions are frequent, and the profits add up. ContentMiddleAd

It’s pretty simple, says Mike Lee, KCT’s president and CEO. Borrowing the money at 1% and parking it at the Fed for 1.25% gets the credit union five easy basis points right there, and there’s plenty left after paying the associated costs and fees.


Kane County Teachers Credit Union
Data as of 06.30.17

HQ: Elgin, IL
ASSETS: $221.3M
MEMBERS: 18,017
12-MO LOAN GROWTH: 21.4%
ROA: 0.60%

KCT is insured through American Share Insurance, which recently won the right to join NCUA-insured credit unions that wish to do the same kind of fixed rate and put-able advance borrowing through the FHLB.

There are 11 different FHLBs in a system created during the New Deal to support housing finance and community investment by providing liquidity to member financial institutions.

KCT had to buy shares in its FHLB to join the program and uses its loan portfolio to collateralize the FHLB loans. It also uses the services of an investment specialist to handle most of the work. The activity is accounted on a monthly basis, and the credit union clears the books each time so as to not negatively affect ROA or capital by showing the overnight loans as assets.

KCT started the FHLB arbitrage in April, and Lee says it’s not just for big credit unions and banks.

Even a $50 million to $100 million credit union can make $4,000 to $5,000 a month, the CEO says. So why not?

KCT Credit Union uses ALM First as its investment advisor. Find your next vendor partner in the Callahan Associates Buyer’s Guide.

Lee joined KCT in 2013 from Alloya Corporate FCU. Since then the credit union’s fortunes have improved, with investment savvy just part of a strategy that has focused on deepening SEG relationships with a heavy dose of relationship lending and financial wellness.

KCT also is using the legal ability to pre-fund the costs of its benefits program by investing in life insurance companies’ investment products. Lee says that alone should generate approximately 2.90% return on the credit union’s investment.

Mike Lee, CEO, Kane County Teachers Credit Union

Altogether, KCT’s investments brought in $1.83 million in the first three quarters of 2017, up 21.38% from the same period in 2016. Loan income is also sharply higher, up 28.42% from $3.26 million to $4.19 million. Meanwhile, fee income dropped 0.62% from $735,125 year to date in third quarter 2016 to $730,570 this year.

A focus on SEGs and financial wellness ― even when it means less profit ― has sparked a sharp recovery at KCT Credit Union. Learn more in Anatomy of Kane County Teachers Credit Union.

Net income, meanwhile, was up 31.10% in the third quarter, compared with 2.98% for credit unions with $100 million to $250 million in assets that have reported quarterly data and 9.67% for all credit unions nationwide that have reported.

Investment income as a proportion of interest income also is much higher at KCT: 30.47% to 13.18% for its peer group and 12.24% nationally.

Although the FHLB arbitrage provides a nice bottom-line bump, Lee does warn against concentration risk.

You don’t want to be too much in one single investment, of course, he says. But, it is interesting that you can take that security and use it as collateral and get, in essence, 20 basis points in such a low-risk way.

Click the tabs below to view graphs.


KCT Credit Union’s income has grown sharply in the past few years. It ranked 26th among its asset-based peer group and 232nd among all credit unions nationwide as of June 30, 2017, according to data from Callahan Associates.


KCT Credit Union was bleeding money and members when Mike Lee took over as CEO in 2013. Since then a focus on SEG relations, relationship lending, and investments has helped bring ROA up to peer par.


KCT Credit Union’s second quarter yield on investments of 2.21% placed it among the top 5% of credit unions with $100 million to $250 million in assets group as well as all credit unions nationwide.

Along with working out the accounting and cash flow, KCT had to take care of some other legwork before it began the arbitrage work. Illinois regulators had to sign off on it. The credit union’s board also had to give its blessing.

My now-retired board chair thought at first it was too good to be true, Lee says. And my vice president of finance, who’s been here for 17 years, says it blows his mind every month.

But it’s not for everyone. KCT’s liquidity needs are low, with its loan-to-share ratio right now just south of 60%.

If you’re at 110%, or you have this great loan machine that’s giving you yield at 4% or more, this might not be for you, Lee says. Depending on your cost of funds, you might be better off borrowing money at 1% to keep that going.

But any credit union executive who wants to know if the nightly put-and-take with the FHLB is worth the time it might take and the money it might make is welcome to contact Lee at or (847) 741-3344, ext. 260. He says he’d love to talk about it some more.

More credit unions need to be doing this, he says.

November 6, 2017

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