Community First CU of Appleton, Wisc., ($1 billion in assets, 77,000 members), a 13-county community charter credit union that is the third largest in the state, held a four-day loan sale beginning January 31. This was the day after the Federal Reserve unexpectedly dropped interest rates 75 basis points prior to their regular meeting; Community First’s pre-made ads (they plugged in the interest rate once the Fed’s regular announcement – an additional .50 bp drop - was made) hit the airwaves within 24 hours of the Fed’s lowering began making news headlines. The credit union offered rates as low as 3.95% on any secured loan, real estate and refis included (the rate was guaranteed for five years). The lowest rates were for the best credit and for loans of at least $10,000 in new money. Persons taking advantage of the loan sale had to have a direct-deposit checking account with the credit union. Community First was hoping for $35 million in loans but got 2,000 calls on the first day and over the four days received 3,000 applications for $158 million in loans. [For more on the loan sale, see the February 2008 Callahan Report –ed.] Cathie Tierney is CEO.
How did the loan sale turn out for you?
CT: It was amazing. We wrote $149 million in loans. Ninety-three percent of the applications were approved. The other 7% were not necessarily poor credit risks; the applicants may have balked at giving us their checking or direct deposit. Thirty-one percent of the applicants were new members, who opened 696 new direct-deposit checking accounts with us. Seventy percent of the $149 million was new money.
How did you finance these loans?
CT: Off our balance sheet; we did no borrowing to cover these loans. We are generally 95-98% loaned out.
Some would say you set the rate too low. How has this worked out for you?
CT: Very well. Not all of the loans were written at 3.95%, of course. That rate was for persons with the best credit. Because of risk-based pricing, the average yield on the entire portfolio of sale loans was 4.27%.; the yield on auto loans was 5.03%. We are not a margin-driven credit union; rather we pride ourselves on being a relationship-driven credit union, and this loan sale helped that. But note that we have exceeded a 1% ROA every year since 1995.
Also while many people with excellent credit were very happy to lock in our best rate, many with B & C credit were very pleased as well. They might have cut their auto loan rate in half from 12% or14%. In one case we cut a car loan rate from 18% to 5.2%, saving the couple $182 a month. Boy, were they happy.
How do the loan-sale participants compare to the average member of your credit union?
CT: We’ve done some analysis and: Of loan-sale households, 76% are profitable, versus 44% for the average member. Loan-sale households use 3.97 credit union services, versus 2.56 for the average member. Loan-sale households have an average deposit balance of $19.5K, versus $17.8K for the average household. The loan balance comparison is $78.9K to $22.1K. Comparing percent of households having three or more services, the numbers are 85% versus 43%, and for percent having checking, the numbers are 96% versus 61%. Thus we developed deep and important relationships for the credit union.
Can you say anything else about the people you attracted?
CT: Just anecdotally. I think that in more than a few cases we attracted people who never before would have thought of doing business with a credit union. But they could see that we had an unbeatable deal. Once we’ve got their attention we take the opportunity to tell them the credit union story – how we are a cooperative — and they begin to see how a cooperative works. I think this sale has done a lot of good helping people understand the intrinsic value of being a member-owner.
How else did the sale help Community First?
CT: As soon as the sale was announced, I received an email from Randy Karnes. I think he summed it up best: “It was about grabbing a moment, running a giant advertisement, and stunning the market for just a second, and in doing so you will have both member and your competition scratching their heads for months to come. And many will wait in anticipation of your next move for quite awhile – and that move never has to happen to achieve the top-of-mind moment you wanted.
Pricing is a simple formula = cost of funds + servicing + (profit – marketing incentives). In most cases we manage that last element to be a positive number, but in some cases we know that marketing incentives are the investment in the future that drive not only future profits but even the chance for future profits.”
Was your staff at all concerned about the workload imposed upon them?
CT: The workload was significant; we were processing 100 to 130 loans a day for a while. But the staff responded heroically. By coincidence we announced their 2007 bonus in January the same night we announced the impending loan sale. The bonus was 7% and naturally well-received. Everyone in attendance could understand that the loan sale was going to take us a good way toward our 2008 loan growth goals, and would also really help our members, so they were excited about it. As it turned out, the loan sale took us a lot farther toward that goal than we had projected. We are now into October in terms of progress toward our yearly growth goal.
And the members are happy, of course.
CT: We tell our members repeatedly “You own Community First and the profits come back to you.” The people who took advantage of our four-day loan sale really believe that. We know we have made some loyal members for life.
What is the greatest potential risk from the sale?
CT: That we would guess wrong and not attract the volume we needed to make it a success. Also, we don’t want a reputation as a low-price provider – we don’t want our members to be sensitized to buy from us strictly on price. But every so often you have to do something big and bold. As I said, we don’t manage to the margin; we feel we are here to help members and focus on building long term relationships. We think we are doing that and we think this loan sale has been a part of that effort.