bank rates

What’s Behind E-Loan’s Top CD Rates?

For CD savers, E-Loan‘s been quite the newsmaker lately.

Over the last three weeks, the online bank has displayed a dramatic change of strategy, catapulting itself from not-even-ranked CD yields to the top spot across five terms on our CD Rates Leaderboard.

Some of its leads are substantial.

Among the country’s best nationally available 5-year CDs, E-Loan outpays the second-place contender by more than a tenth of a percentage point and the next-best 3-year return by nearly two-tenths of a point.

So it’s natural we’d be wondering, “Why the sudden, aggressive push for deposits? What’s going on at E-Loan?”

Then news broke Monday of the financial turmoil triggered in Puerto Rico as the government defaulted on a key bond payment, and our questions multiplied.

Why? Because E-Loan is an online operation of Banco Popular North America, which is a subsidiary of Puerto Rico-based parent company, Popular Inc.

Since we know E-Loan’s current rates – which are among the best we’ve seen since the summer of 2011 – will entice many readers, we decided to check into whether the news from Puerto Rico should give prospective E-Loan customers any pause.

Let’s get a couple of easy things out of the way first.

Puerto Rico is a U.S. commonwealth, which means it uses the U.S. dollar and subjects Popular Inc. to the same federal rules and regulations as any other American company.

It also means you can count on the Federal Deposit Insurance Corp. to insure your savings just as it would for every other American bank.

“Any bank you find in the FDIC database, with an FDIC certificate number assigned to it, carries the same deposit insurance up to $250,000,” according to FDIC spokesman Greg Hernandez.

Go to the FDIC’s search tool to look up Banco Popular North America, which is headquartered in New York, and you’ll easily find its listing and FDIC certificate number.

You’ll also find its sister bank, Banco Popular de Puerto Rico, which is the island’s largest bank. The two subsidiaries of Popular are separate entities, and each has its own FDIC insurance.

So what about the negative financial news coming out of Puerto Rico? Could it have anything to do with E-Loan’s sudden push to garner large amounts of U.S. deposits? Is it a warning sign that, like Puerto Rico’s government, Popular is in financial straits?

The answer to both questions is no.

After asking E-Loan and Banco Popular North America why it was paying such great rates – and getting no response – I called Brian Klock, a managing director at Keefe, Bruyette & Woods, an investment bank and broker-dealer specializing in tracking the financial services sector.

Klock covers Puerto Rico’s banks and has been following Popular for the better part of the last 11 years.

Rather than a bank in trouble, Klock sees exactly the opposite.

Over the last nine to 10 months, he said Banco Popular North America has reorganized, strengthened its focusand improved its operating efficiency – all combining to generate significant growth.

“Popular’s profitability has been growing faster than expected, because the U.S. mainland growth has been coming so much faster than they thought,” Klock says. “It really is a newer, healthier, more profitable bank now than what it was just a year ago.”

He explains that the first step toward the new-and-improved Banco Popular North America came last summer, when it paid off its bailout-era obligation to the U.S. government’s Troubled Assets Relief Program.

Once free of its TARP debt, the bank sold its West Coast, Chicago and central Florida branches to focus more strongly on its core business in New York, New Jersey and southern Florida, where it now has almost 60 Popular Community Bank offices.

Then, in March, Popular acquired assets from Doral Bank, another Puerto Rican bank, which was seized and sold by the FDIC, contributing even more favorably to Banco Popular’s mainland balance sheet.

In banking, assets largely refers to loans and credit the bank has extended, because that lending generates revenue for the bank in the form of interest payments from customers.

A growing loan portfolio means the bank needs to similarly grow its base of deposits so that it has sufficient money to make those loans.

In the case of Banco Popular North America, its loan portfolio is growing so quickly that, according to Klock, its ratio of loans to deposits has risen to a high 94%.

“The 85-90% range is considered good core funding, so in the mainland U.S., Popular wants to see that come down closer to 90%,” explained Klock. “That’s why it’s out trying to grow deposits more aggressively in the U.S.”

When it comes to the lending, E-Loan is mostly an advertising site for other companies such as Lending Tree (mortgages) and Santander (auto loans). But the deposits it takes in through certificates of deposit and savings accounts go to Banco Popular NA.

As for the news about Puerto Rico’s government default, Klock doesn’t see any connection between those troubles and Banco Popular’s safety for depositors.

“It’s not a direct problem for Popular,” he explains. “Popular doesn’t have any exposure directly to that central government.”

In other words, the Puerto Rican government may have defaulted on some of its bonds, but none of that debt is owed to Popular.

Now that we’ve established E-Loan CDs as safe buys, you’re probably wondering how long these new rates will last.

No amount of research could reveal that. But it’s smart to expect they’ll only be available for as long as it takes Banco Popular to sufficiently fortify its deposit base.

It’s also important to note that E-Loan’s early withdrawal penalties are among the stiffest in the industry, imposing up to two years of interest on a 5-year CD.

So only secure one of E-Loan’s hot rates if you have reasonable confidence you’ll hold the certificate to maturity.

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