Dollar Rolls Liven Up Investments At Ent Credit Union

The Colorado cooperative’s mortgage-backed security re-purchase strategy makes more of investments and funds member give-back programs.

 
 

CU QUICK FACTS

Ent Credit Union
Data as of 03.31.17

HQ: Colorado Spring, CO
ASSETS: $4.9B
MEMBERS: 285,045
BRANCHES: 29
12-MO SHARE GROWTH: 13.6%
12-MO LOAN GROWTH: 11.9%
ROA: 0.87%

Ent Credit Union ($4.9B, Colorado Springs, CO) makes a few hundred thousand dollars every year by serving up dollar rolls.

A dollar roll is a form of financing in which an investor — in this case, Ent — sells a mortgage-backed security (MBS) on one date and buys it back at a previously agreed upon lower price, in Ent’s case one month later.

The credit union gets the benefit of the lower price ― known as the “drop” ― when it buys the securities back, while the broker in the meantime gets to use the securities for its own purposes.

MJ Coon, Executive Vice President and CFO, Ent Credit Union

Along with the drop, the buyer invests proceeds from the monthly sale with either the Fed or into an investment repurchase transaction, typically called an investment repo. Ent CFO MJ Coon says she expects a 1% yield on the Fed investment but adds Ent could earn a few more basis points by investing those proceeds in an investment repo.

Ent Credit Union uses ALM First Financial Advisors as its dollar roll advisor. Find your next provider in Callahan's online Buyer's Guide.

Coon says her credit union averages around $75 million in outstanding bonds in this strategy at any given moment and has made approximately $1.5 million since it began using dollar rolls in May 2014.

Dollar rolls involve the effective use of MBS investments many credit unions already hold in portfolio or purchases for this purpose.

“Laying out carefully established stipulations in counter-party agreements ensure you do not end up taking delivery of securities that might not be as attractive as the bond you sold,” Coon says.

Dollar rolls pose no interest rate risk. The credit union commits to both the sell price and the repurchase price before entering the transaction as well as how much it will earn on the proceeds from the sale over the 30-day period. If it doesn’t make sense this month, Ent sits on the sidelines and foregoes the transaction.

Since inception of this strategy, Ent has had anywhere from $20 million up to $140 million in play at any given time, Coon says. Some months the credit union “rolls” and some months it doesn’t.

“The heavy lifting is getting started and making sure everyone has a full understanding of the entire process,” Coon says. “Once the complex accounting requirements of this strategy are understood, then it becomes routine.”

They’re not a home run. But as long as each deal compensates us for doing them, we’re good.

MJ Coon, EVP/CFO, Ent Credit Union

Ent’s regulators have had no objections to this strategy. The credit union has been through three examinations since it began using dollar rolls and has had no issues over them. Coon also says that although dollar roll investing is not for everyone, she and her staff have been happy to share their experience with other credit unions.

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Although $500,000 a year is not that material to the bottom line in an almost $5 billion credit union, it’s money Ent otherwise wouldn’t have. These small “singles” allows Ent more opportunity to invest in returning value to its members, Coon says.

Those give-back programs might include above-market rates on CDs to celebrate the credit union’s 60th anniversary or a list of cash awards for using enhanced services through the credit union’s Ent Extras program.

Ent continues to build that program, Coon says, and budgeted $10.5 million to it in 2017. That venture also has positive yield: The Colorado cooperative currently has a score of 94.42 out of 100 in Callahan’s exclusive Return of the Member (ROM) index, a scoring system of member value provided by the credit union.

So what’s the role of dollar rolls there?

“They help pay for it,” Coon says. “We enjoy finding little things like this that add to our abilities to give back.”

Of course, no program is without its drawbacks, and that’s true of this investment strategy, too.

“They’re not a home run,” says the seasoned CFO, herself a former regulator. “They’re not going to save a failing credit union. But as long as each deal compensates us for doing them, we’re good. There might come a time when this won’t make sense any longer, but when that happens, we’ll take delivery of the outstanding deal, go on our merry way, and say ‘yay.’”

 

 

 

June 5, 2017


Comments

 
 
 
  • When they sell the roll are they rolling out the worst to deliver (TBA) bonds in their portfolio, because what they get back the following month will certainly be worst to deliver. Rolling is a good strategy but is the credit union making sure they are not rolling out bonds that are better than worst to deliver.....ie specified pools with attractive characteristics that dealers "pay up" for?
    Eric Salzman
     
     
     
  • My apologies. I missed this “Laying out carefully established stipulations in counter-party agreements ensure you do not end up taking delivery of securities that might not be as attractive as the bond you sold,” Coon says. I would just add that when rolling you should always look at the implied cost of funding from the roll versus your internal funding. Like the above article says, sometimes it is advantageous to roll and sometimes not.
    Eric Salzman
  • Thank you for taking the time to comment, Eric, and for your observations.
    Marc Rapport