Know Before You Grow

A Colorado credit union’s popular CD special drew in $80 million as well as rate chasers looking for a good deal during bad times.

When Ent Federal Credit Union($4.2B, Colorado Springs, CO) launched a 50th anniversary certificate special six years ago, the cooperative had no way of knowing the country was about to run headlong into the worst economic crisis since the Great Depression.

Almost as soon as the credit union announced the promotion in January 2009, market rates dropped precipitously as the United States entered the beginning stages of a multi-year recession.

We had modeled multiple factors, including assumptions of how much money might come from shares and reprice in the certificate special, estimated costs of the special, incremental cost of potential new money, and how it would affect return on assets,says MJ Coon, executive vice president and chief financial officer of Ent.We had modeledeverything butnot a material drop and an extended period of record low interest rates resulting from a serious recession.

The rapid drop in market rates during the two-month promotional period caused demand to spike much higher than the credit union anticipated. Ent brought in $80 million in new money, which grew to $143 million by the time the certificates began maturingin 2014.

For Ent FCU and all U.S. credit unions | Data as of 06.30
Callahan & Associates |

Source:Peer-to-Peer Analytics by Callahan & Associates

A rapidly deteriorating economy in 2009 caused demand for Ent’s high-rate, 50-month CD to spike much higher than the credit union anticipated. However, Ent estimates $46 million left the credit union after the certificates matured.

Celebration Shadowed By Economic Crisis

The credit union designed the certificate special as a 50th anniversary giveback to loyal members. It offered both existing and new members a 4.15% APY on a 50-month certificate of deposit at a time when prevailing average five-year CD rates were trendingbelow 3%. Account holders could deposit additional funds once within the first 12 months and withdraw up to half of the total balance without penalty.


Data as of 06.30.15

  • HQ: Colorado Springs, CO
  • MEMBERS: 255,117
  • 12-MO SHARE GROWTH: 5.62%
  • 12-MO LOAN GROWTH: 23.56%
  • ROA: 1.13%

It was hugely successful, Coon says.It drew in $80 million and would not have been an issue had we not launched it at exactly the same time the country went into a severe recession.

According to Coons, Ent lost an opportunity by not being able to move interest rates down on the certificates.

The special definitely attracted rate shoppers, Coon recalls.We estimate $46 million left the credit union upon maturity totally hot money. We paid well above market over the course of the 50-month special, meaning our netinterest margin was negatively impacted, notably but not materially. We were fortunate we could work through that without any problems and were still a top-performing credit union throughout that period.

In fact, despite the influx of deposit balances directly attributable to the promotion, the certificate special represented only 2.65% of Ent’s total deposits at initial offering although balances grew to a high of 4.68% of total depositsby the end of the 50-month period.

The experience means Coon now has some sage advice to offer credit unions of all sizes.

It is critical to manage a CD promotion straight through maturity, she says.Focus on when the special matures and where that money might go. The biggest trap is in having to offer a follow-up special because you need to keep themoney. That is not a good strategy because you’re not in charge.

An Alternative To Certificates

Despite the challenges of dealing with a reduced net interest margin, Coon says Ent has not ruled out offering another certificate special to its members.

We just introduced a new 84-month CD product, Coon says.It’s not a special per se. We offered it with more of the retirement segment in mind. In the first month it brought in $3.5 million in new deposits.

Executives at Ent are considering running another true certificate special because its year-over-year loan growth is approaching 24%. Its loan-to-share ratio currently hovers at 90%, with a good mix of growth between consumer and residential lending.That ratio is close to Ent’s target, although Coon is fine if it goes a bit higher because the credit union has demonstrated it can manage such growth properly.

For Ent FCU all U.S. credit unions | Data as of 06.30
Callahan & Associates |

Source: Peer-to-Peer Analytics by Callahan & Associates

Ent Federal Credit Union’s loan-to-share ratio is close to 90%; however, according to CFO MJ Coon, the ratio could climb closer to 100% and Ent would still be able to manage it properly.

But in recent years, Ent has preferred to offer member dividends instead of promotional deposit rates.

We prefer to pay back special member dividends, Coon says.When we did the 50-month anniversary special, we rewarded our savers. Unfortunately, members in the borrowing stage of life got nothing. So we’ve decided to give backto all of our members.

A key benefit of the special member dividend is that it doesn’t create asset-liability management (ALM) and liquidity challenges the credit union has already earned the funds when it makes the decision to pay the dividend. Also, a specialdividend does not impact the balance sheet for years to come.

According to Coon, Ent paid $10 million two years ago and $12.5 million last year in special member dividends. The credit union also awarded $3 million in its loan payout program Ent Extras last year.

These programs represent a true giveback to all of our members for being loyal, not for chasing hot money, Coon says.

Sustainable Deposit Growth

For Coon, an 18-year Ent employee and former NCUA examiner, ALM is the key to prudent deposit growth.

We have a low-risk profile, Coon says.We hedge our risk on our balance sheet through the purchase of derivatives, which is akin to buying insurance on our balance sheet. We have not experienced overheated deposit growth since therecession, just slow and steady growth.

During the mortgage refinance boom, Ent’s mortgage sales to the secondary market made sense for managing credit and interest rate risk, but its ROA became heavily skewed toward sales gains in the year of the sale versus loan income in the yearsto come. According to Coon, keeping up that pace of sales meant the credit union would have nothing to earn on in the future exceptpaltry investment yield.

That’s when we stepped up our efforts to get into the derivatives program, the executive notes.We bought our first derivatives in 2011.

But perhaps the most important factor to sustain and manage deposit growth is to focus on being a reliable, trustworthy place for members to do business.

Loyalty goes a long way in members wanting to keep their money here, Coon says.If you treat your members well, you don’t have to give away the farm.

January 28, 2016

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