Wednesday, May 1, 2019

Union Yes FCU Seeks to Raise $4 Million in Secondary Capital

The American Banker is reporting that a undercapitalized credit union in Orange, California, is looking to raise $4 million in secondary capital.

The $63.4 million-asset Union Yes Federal Credit Union recently launched a capital campaign, offering subordinated debt with fixed and variable interest rates of 4 percent to 4.5 percent with maturities of five to seven years.

The minimum size of the investment is $250,000.

While many credit unions can only build capital through retained earnings, low-income credit unions, such as Union Yes FCU, are permitted to raise secondary capital from investors.

According to the prospectus, the credit union has been experiencing very strong growth and needs the capital to fund new membership growth.

However, investors are going to receive a higher rate of return on their investment than credit union members. For example, the highest current rate for the 60-month CD is 0.35 percent.

This higher rate of return is compensation to investors for potential credit risk, if the credit union fails.

But it also means that the credit union tax subsidy is going to investors instead of the members.

Read the article (subscription required).
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2 comments:

  1. AnonymousMay 1, 2019 at 11:45 AM

    Really? The tax benefit to the secondary capital investors? Right? If any of their money is needed to cover capital shortfalls, they will NOT get that money back. Part of that risk is in the 4%ish return on investment. There is no federal deposit insurance. Again, that risk has a price which is included in the 4%ish rate. Good Doctor, you are going down the Leonard Tose Highway looking for the Leonard Tose offramp. Because like the former Philly Eagles owner, you are losing it.

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