Wednesday, March 8, 2017

Who Should Be Allowed to Purchase Alternative Capital?

The National Credit Union Administration (NCUA) Board is requesting comment on whether the sale of secondary and supplemental capital should be limited to only institutional investors, include accredited investor, or allow for anyone to purchase.

I do not believe that the NCUA Board should allow anyone to purchase secondary or supplemental capital.

Many people lack financial sophistication. For people lacking financial sophistication, this product would not be suitable.

NCUA should either require credit unions issuing alternative capital to comply with the Security and Exchange Commission's Regulation D or issue regulations comparable to Regulation D.

Under Regulation D, an organization can issue debt or equity through a private offering without officially registering the offering to “go public”. This exemption reduces the amount of paperwork required, lessening the time and money it takes to actually raise capital.

However, the Securities and Exchange Commission encourages or requires companies to work with accredited investors when raising capital through a private offering. The rule gives room for 35 non-accredited investors to participate so long as disclosure requirements are met and any non-accredited investor must be a sophisticated investor.

Accredited investor is defined as an individual that has made $200,000 or more on an annual basis for the past two out of three years and is likely to make that same amount this year. If it is a couple qualifying together that amount is raised to $300,000. If they do not meet the income requirements, they can qualify using a net worth of over $1 million excluding their primary residence.

A sophisticated investor is defined as someone that has superior knowledge of business and financial matters.


  1. Secondary/supplemental/alternative capital is simply not needed by any credit union operating as a not-for-profit, member-focused, tax-exempt credit union. It is not even wanted by most credit unions. The 10 year quest for additional capital spanned the great recession and CUs are bigger, stronger, and more diverse than before the corporate cu crisis. At some point the CU leaders need to sit back and appreciate what they have instead of pushing for more, more, more.
    Dale Kerslake
    Cascade FCU

  2. Dale – as a community banker in your home state, I agree with you. The truth is credit unions already receive supplemental capital. Let’s look at your credit union as an example. It appears that your credit union is well run and member-focused; adhering to the credit union philosophy.

    In 2016, your net income was just over $2 million. If you were a bank, you would have had a corporate tax liability of about $700 thousand. If you were headquartered in California, it would have been closer to $800 thousand. If you were a Sub-S bank, the tax liability would have been effectively the same because Sub-S banks must make mandatory distributions of capital so their investors can pay the corporate tax liability. The IRS does not give a free pass to Sub-S corporations.

    In 2016, your credit union received supplemental capital totaling $700 thousand. Every other credit union received a similar benefit (35% of net income being their supplemental capital for the year).

    I take no issue with credit unions having a tax advantage, but realize it for what it is; supplemental capital. If a credit union needs supplemental capital above and beyond the tax advantage, it should look inward; it’s probably not operating efficiently enough to survive in the first place.

    1. Anonymous - you are better in tune with credit unions than many of the "leaders" in the CU industry. NCUA is seeking input on supplemental capital. I hope you post your comments on NCUA's website. D Kerslake

  3. Keith -- I have a question for you and have not had the time to read through the proposed regulation for comment. What is to stop an investor group from coming in with "preferred" capital and demanding a rate of return or some other form of remuneration that takes advantage of the tax exempt status of a credit union. If I owned a bank that did not have to pay taxes and could get a rate of return on my investment by capturing market share by using my tax advantage, I guarantee you I would do it.

    1. NCUA believes that this instrument would be priced 300 to 400 basis points above the interest rates on ten-year Treasury note. This was based upon analysis of subordinated debt issued by community banks.

    2. So, a CU CEO could find some investors, pay them ten-yr plus 400 bps, use the tax advantage to take market share from banks, and collect a big bonus because of a "deal" worked out with the investors. Does that "incentive" opportunity exist with the advent of investor owned capital as proposed by NCUA? If so, this is arbitrage just waiting to happen.



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