The National Credit Union Administration (NCUA) Board is proposing to allow aspiring low-income credit unions (LICU) and non-LICU complex credit unions to issue subordinated debt.
Currently, the Federal Credit Union Act only allows LICUs to issue secondary capital.
An aspiring LICU or non-LICU complex credit union is defined as a credit union that anticipates being designated as a LICU or Nnn-LICU Complex Credit Union within 24 months following their planned issuance of the subordinated debt.
For example, there are 40 credit unions with total assets between $450 and $500 million of which 21 are non-LICUs. NCUA expects this number of credit unions may increase over time. This means more non-LICUs could be designated as aspiring complex credit unions.
However, these aspiring LICUs and non-LICU complex credit unions would not be allowed to count this subordinated debt as regulatory capital for prompt corrective action purposes until they become either an LICU or non-LICU complex credit union.
But allowing these aspiring credit unions to issue subordinated debt will fuel rapid growth. This will allow these credit unions to achieve the complex credit union threshold -- permitting these credit unions to count this subordinated debt as regulatory capital.
This proposal would subvert the purpose of prompt corrective action, which is meant to curb aggressive growth.
Moreover, this proposal regarding aspiring credit unions is troubling. The Federal Credit Union Act only discusses low-income credit unions and complex credit unions. It does not mention aspiring LICUs or non-LICU complex credit unions.
This is another case of this agency engaging in regulatory fiat.
Showing posts with label Secondary Capital. Show all posts
Showing posts with label Secondary Capital. Show all posts
Monday, March 30, 2020
Monday, March 23, 2020
CUNA Uses Coronavirus to Push Legislative Priorities
Rahm Emanuel is quoted as saying "You never want a serious crisis to go to waste."
It appears that the Credit Union National Association (CUNA) has taken his quote to heart.
The credit union trade group is using the coronavirus to push their agenda to increase the ability of credit unions to make business loans and gain access to secondary capital.
In a March 19 letter to Congress, CUNA urged Congress to:
Read the letter.
It appears that the Credit Union National Association (CUNA) has taken his quote to heart.
The credit union trade group is using the coronavirus to push their agenda to increase the ability of credit unions to make business loans and gain access to secondary capital.
In a March 19 letter to Congress, CUNA urged Congress to:
- Enact legislation exempting credit union business loans made during federally declared disasters and emergencies from the Credit Union Member Business Lending Cap;
- Enact legislation to exempt fully government-guaranteed loans made through programs at the Small Business Administration, Department of Agriculture and other agencies from the Credit Union Member Business Lending Cap; and
- Ensure that any new small business lending programs created through the Small Business Administration or other government agencies include an opportunity for credit unions to participate.
Read the letter.
Tuesday, November 5, 2019
NCUA Board Upholds Denials of Secondary Capital Plans
The National credit Union Administration Board in October upheld the Supervisory Review Committees (SRC) affirmation of the denials of two unnamed low-income credit unions' applications to accept secondary capital by Regional Directors.
In one appeal, the Board on September 9, 2019 denied a request for an oral hearing from a low-income credit union (LICU); but agreed to consider the merits of the appeal on the basis of the written record.
Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.
In its October 24 decision, the Board found that there was ample evidence that the LICU's secondary capital plan was unsound.
The Board viewed that the LICU's secondary plan reflected inadequate due diligence.
The pro forma financial statements lacked detail and had material omissions, which did not allow the agency to properly evaluate the safety and soundness of the plan.
Moreover, the secondary capital plan failed to adequately align with the LICU’s forecasts and strategic plan. Specifically, both the Region and the SRC have determined, and the Board agrees, that because there is a negative spread between the projected interest rate for the secondary capital loan and the average rate of return for the assets in the safety net plan, this negative spread will become a stress on earnings and a duration mismatch between funding sources.
The Board concluded the SRC was correct in affirming the Regional Director's denial.
In the other appeal, the Board on August 8, 2019 granted the LICU's request to present its case orally before the Board. The hearing was held on September 24.
Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.
The credit union contended that its secondary capital plan that met the criteria in §701.34(b)(1). Therefore it should receive the requested capital. The LICU stated that the three deficiencies identified by the Region were subjective and should not be a valid basis for denying the secondary capital plan.
The Region, on the other hand, argued that the five enumerated criteria provide for the minimum components that are required to be included in a secondary capital application.
The SRC found ample support for the Region’s assessments that the LICU's secondary capital plan was not sound, and concluded the denial of the plan was reasonable.
In its October 11 decision, the Board did not find the LICU's arguments to be persuasive. The Board stated it should not substitute its judgment for the SRC. Therefore, the Board affirmed the SRC decision.
The Board stated that in both cases the credit unions choose to reapply for secondary capital. But if they decide to re-apply, the agency encourages ongoing dialogue to address deficiencies discussed in previous denials.
In one appeal, the Board on September 9, 2019 denied a request for an oral hearing from a low-income credit union (LICU); but agreed to consider the merits of the appeal on the basis of the written record.
Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.
In its October 24 decision, the Board found that there was ample evidence that the LICU's secondary capital plan was unsound.
The Board viewed that the LICU's secondary plan reflected inadequate due diligence.
The pro forma financial statements lacked detail and had material omissions, which did not allow the agency to properly evaluate the safety and soundness of the plan.
Moreover, the secondary capital plan failed to adequately align with the LICU’s forecasts and strategic plan. Specifically, both the Region and the SRC have determined, and the Board agrees, that because there is a negative spread between the projected interest rate for the secondary capital loan and the average rate of return for the assets in the safety net plan, this negative spread will become a stress on earnings and a duration mismatch between funding sources.
The Board concluded the SRC was correct in affirming the Regional Director's denial.
In the other appeal, the Board on August 8, 2019 granted the LICU's request to present its case orally before the Board. The hearing was held on September 24.
Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.
The credit union contended that its secondary capital plan that met the criteria in §701.34(b)(1). Therefore it should receive the requested capital. The LICU stated that the three deficiencies identified by the Region were subjective and should not be a valid basis for denying the secondary capital plan.
The Region, on the other hand, argued that the five enumerated criteria provide for the minimum components that are required to be included in a secondary capital application.
The SRC found ample support for the Region’s assessments that the LICU's secondary capital plan was not sound, and concluded the denial of the plan was reasonable.
In its October 11 decision, the Board did not find the LICU's arguments to be persuasive. The Board stated it should not substitute its judgment for the SRC. Therefore, the Board affirmed the SRC decision.
The Board stated that in both cases the credit unions choose to reapply for secondary capital. But if they decide to re-apply, the agency encourages ongoing dialogue to address deficiencies discussed in previous denials.
Thursday, October 3, 2019
Secondary Capital Up 10.5 Percent During the 1st Half of 2019
Low-income credit unions added secondary capital during the first six months of 2019.
Sixty-eight credit unions have $292.1 million in subordinated debt that counted as net worth at the end of June 2019.
This is up from $264.8 million at the end of 2018.
The following table shows the 10 credit unions holding the most secondary capital.
Six credit unions reported that more than half of their net worth was from secondary capital. At Hope FCU (Jackson, MS), 75.3 percent of its net worth was in the form of subordinated debt.
The other credit unions reporting that at least half of their new worth was from subordinated debt were:
Sixty-eight credit unions have $292.1 million in subordinated debt that counted as net worth at the end of June 2019.
This is up from $264.8 million at the end of 2018.
The following table shows the 10 credit unions holding the most secondary capital.
Six credit unions reported that more than half of their net worth was from secondary capital. At Hope FCU (Jackson, MS), 75.3 percent of its net worth was in the form of subordinated debt.
The other credit unions reporting that at least half of their new worth was from subordinated debt were:
- LCO FCU (WI), 69.4 percent;
- Hill District FCU (PA), 62.8 percent;
- Self-Help FCU (CA), 58.9 percent;
- Syracuse Cooperative FCU (NY), 57.8 percent; and
- Toledo Urban FCU (OH), 50.1 percent.
Tuesday, September 17, 2019
NCUA Issues Guidance on Secondary Capital Plans
The National Credit Union Administration (NCUA) issued guidance to staff on credit unions offering secondary capital.
NCUA wrote that many low-income credit unions (LICUs) have a record of prudently using secondary capital; however, some planned uses of secondary capital can be complex and involve higher risk.
NCUA re-iterated in its letter to staff that there is no "one size fits all" secondary capital plan for LICUs.
The supervisory letter should help LICUs to better understand the secondary capital plan submission process.
The letter also explains the safety and soundness expectations of the agency regarding secondary capital plans.
Appendix A includes examiner review questions. A LICU should be prepared to discuss these questions with their examiner and address these questions in its written plan.
This letter makes it clear that if a LICU plans to offer secondary capital, the LICU will need to follow NCUA's lead.
Read the letter.
NCUA wrote that many low-income credit unions (LICUs) have a record of prudently using secondary capital; however, some planned uses of secondary capital can be complex and involve higher risk.
NCUA re-iterated in its letter to staff that there is no "one size fits all" secondary capital plan for LICUs.
The supervisory letter should help LICUs to better understand the secondary capital plan submission process.
The letter also explains the safety and soundness expectations of the agency regarding secondary capital plans.
Appendix A includes examiner review questions. A LICU should be prepared to discuss these questions with their examiner and address these questions in its written plan.
This letter makes it clear that if a LICU plans to offer secondary capital, the LICU will need to follow NCUA's lead.
Read the letter.
Friday, September 13, 2019
CUs O-fer in Secondary Capital Plan Appeals to SRC
Credit unions have a zero batting average for secondary capital plan appeals to the Supervisory Review Committee (SRC) of the National Credit Union Administration (NCUA) during the first seven months of 2019.
Five credit unions appealed the denial of their secondary capital plans from the NCUA Region Directors. Four of the appeals involved applications to accept secondary capital and one appeal was to increase the amount of secondary capital accepted by the credit union.
The SRC upheld the denial of the Region Directors in all five cases.
Below are some of the highlights from the SRC decisions.
In several cases, credit unions stated that they met the five requirements of the rule and should be allowed to accept secondary capital. (12 C.F.R. § 701.34) However, the SRC opined that "there is no duty for the Regional Director to approve a secondary capital application simply because the plan meets the five requirements of the rule." The SRC concluded that it is within the authority and discretion of the Regional Director to review the safety and soundness exposure of the credit unions.
The SRC found deficiencies in various credit union's plans, which in some cases were overly simplistic or inadequate. In a couple cases, the credit unions stated the secondary capital was meant to support loan growth without specifying the types of loans the credit union will add to their balance sheets. The SRC believed that subject ambiguity posed a safety and soundness concern.
In one case, the Region Director sought to reduce the amount of secondary capital that the credit union could accept because of safety and soundness concerns due to interest rate risk associated from concentration in real estate secured assets. The Regional Director wanted to reduce the amount of balance sheet leverage at the credit union. In addition, the credit union should not make unsecured secondary capital loans to other credit unions. (Read the decision SRC-03-19).
Another credit union's secondary capital plan posed safety and soundness concerns due to inadequate liquidity risk assessment, incomplete interest rate risk assessment, and no exit or stop-loss strategy. (Read the letter SRC-02-19).
In another decision, the SRC concluded that "the credit union failed to assess key risks arising from the plan’s reliance on high levels of market sensitive wholesale funding (nonmember deposits and borrowing) and deployment of funds into higher risk assets." Here is letter SRC-01-19.
Furthermore, as part of a credit union's board of directors due diligence, the board is expected to address the pros and cons of the specific secondary capital plan, not a generic discussion about the pros and cons of secondary capital. In one case, there was not evidence that the board discussed the specifics of the secondary capital plan.
Read SRC-06-19.
Read SRC-05-19.
Five credit unions appealed the denial of their secondary capital plans from the NCUA Region Directors. Four of the appeals involved applications to accept secondary capital and one appeal was to increase the amount of secondary capital accepted by the credit union.
The SRC upheld the denial of the Region Directors in all five cases.
Below are some of the highlights from the SRC decisions.
In several cases, credit unions stated that they met the five requirements of the rule and should be allowed to accept secondary capital. (12 C.F.R. § 701.34) However, the SRC opined that "there is no duty for the Regional Director to approve a secondary capital application simply because the plan meets the five requirements of the rule." The SRC concluded that it is within the authority and discretion of the Regional Director to review the safety and soundness exposure of the credit unions.
The SRC found deficiencies in various credit union's plans, which in some cases were overly simplistic or inadequate. In a couple cases, the credit unions stated the secondary capital was meant to support loan growth without specifying the types of loans the credit union will add to their balance sheets. The SRC believed that subject ambiguity posed a safety and soundness concern.
In one case, the Region Director sought to reduce the amount of secondary capital that the credit union could accept because of safety and soundness concerns due to interest rate risk associated from concentration in real estate secured assets. The Regional Director wanted to reduce the amount of balance sheet leverage at the credit union. In addition, the credit union should not make unsecured secondary capital loans to other credit unions. (Read the decision SRC-03-19).
Another credit union's secondary capital plan posed safety and soundness concerns due to inadequate liquidity risk assessment, incomplete interest rate risk assessment, and no exit or stop-loss strategy. (Read the letter SRC-02-19).
In another decision, the SRC concluded that "the credit union failed to assess key risks arising from the plan’s reliance on high levels of market sensitive wholesale funding (nonmember deposits and borrowing) and deployment of funds into higher risk assets." Here is letter SRC-01-19.
Furthermore, as part of a credit union's board of directors due diligence, the board is expected to address the pros and cons of the specific secondary capital plan, not a generic discussion about the pros and cons of secondary capital. In one case, there was not evidence that the board discussed the specifics of the secondary capital plan.
Read SRC-06-19.
Read SRC-05-19.
Tuesday, August 27, 2019
NCUA Board Dismisses Secondary Capital Plan Appeal by LICU
The National Credit Union Administration (NCUA) Board dismissed an appeal of a low-income state chartered credit union's secondary capital plan on procedural grounds.
The unnamed low-income credit union on January 11, 2019 applied to a unspecified NCUA Region for the authority to accept secondary capital. This unnamed credit union may be Freedom Northwest Credit Union (Kamiah, ID), which had its secondary capital plan denied earlier this year.
The NCUA Region on February 25 denied the credit union'e request. On March 18, 2019, the low-income credit union made a written request for reconsideration. Upon reconsideration, the Region upheld its initial decision and denied the credit union's request to accept secondary capital in a letter dated April 24, 2019.
The credit union on May 17, 2019 appealed the decision to NCUA's Supervisory Review Committee. The credit union stated that the approval or disapproval of a secondary capital plan resided with the state regulator and only required the concurrence of NCUA.
On June 4, 2019, the Region issued a letter to the credit union stating that it had erred in its determination of the credit union's secondary capital plan without a prior approval or disapproval of the state regulator and rescinded its findings.
Because the Region had rescinded its determination, the Supervisory Review Committee on June 5, 2019 concluded it did not have jurisdiction to review the matter.
On July 1, 2019, the credit union appealed to the NCUA Board the decision by the Supervisory Review Committee stating that its findings were inconsistent with applicable law and should be reversed. The credit union also requested an oral hearing.
The NCUA Board on July 18, 2019 denied the request for an oral hearing and affirmed the decision of the Supervisory Review Committee.
Read more.
The unnamed low-income credit union on January 11, 2019 applied to a unspecified NCUA Region for the authority to accept secondary capital. This unnamed credit union may be Freedom Northwest Credit Union (Kamiah, ID), which had its secondary capital plan denied earlier this year.
The NCUA Region on February 25 denied the credit union'e request. On March 18, 2019, the low-income credit union made a written request for reconsideration. Upon reconsideration, the Region upheld its initial decision and denied the credit union's request to accept secondary capital in a letter dated April 24, 2019.
The credit union on May 17, 2019 appealed the decision to NCUA's Supervisory Review Committee. The credit union stated that the approval or disapproval of a secondary capital plan resided with the state regulator and only required the concurrence of NCUA.
On June 4, 2019, the Region issued a letter to the credit union stating that it had erred in its determination of the credit union's secondary capital plan without a prior approval or disapproval of the state regulator and rescinded its findings.
Because the Region had rescinded its determination, the Supervisory Review Committee on June 5, 2019 concluded it did not have jurisdiction to review the matter.
On July 1, 2019, the credit union appealed to the NCUA Board the decision by the Supervisory Review Committee stating that its findings were inconsistent with applicable law and should be reversed. The credit union also requested an oral hearing.
The NCUA Board on July 18, 2019 denied the request for an oral hearing and affirmed the decision of the Supervisory Review Committee.
Read more.
Thursday, June 20, 2019
NCUA Board Proposes Delaying Risk-Based Capital Rule by Two-Years
The National Credit Union Administration Board on June 20th voted on a proposal to delay by two-years the implementation date of its risk-based capital rule until January 1, 2022.
Currently, the risk-based capital rule was scheduled to go into effect on January 1, 2020.
NCUA staff stated that the delay would not pose undue risk to the National Credit Union Share Insurance Fund.
Also, the delay would allow the NCUA Board to examine whether asset securitization should be accounted for by NCUA's capital standards; whether certain forms of subordinated debt should qualify as capital for risk-based capital purposes; and whether a community bank leverage ratio analog should be integrated into NCUA's capital standard.
NCUA Chairman Hood stated that he intends to bring forth a proposed rule allowing subordinated debt count towards a risk-based capital standard by the end of this year.
NCUA further stated that the delay would benefit credit unions by allowing them to allocate resources to implementing the Financial Accounting Standards Board current expected credit loss (CECL) standard.
Moreover, the time delay would allow NCUA to direct additional time and resources toward modernizing its examination systems.
Board member McWatters and Chairman Hood voted for the proposal.
Board member Harper dissented to delaying the risk-based capital rule and voted no on the proposal.
Read the proposed rule.
Currently, the risk-based capital rule was scheduled to go into effect on January 1, 2020.
NCUA staff stated that the delay would not pose undue risk to the National Credit Union Share Insurance Fund.
Also, the delay would allow the NCUA Board to examine whether asset securitization should be accounted for by NCUA's capital standards; whether certain forms of subordinated debt should qualify as capital for risk-based capital purposes; and whether a community bank leverage ratio analog should be integrated into NCUA's capital standard.
NCUA Chairman Hood stated that he intends to bring forth a proposed rule allowing subordinated debt count towards a risk-based capital standard by the end of this year.
NCUA further stated that the delay would benefit credit unions by allowing them to allocate resources to implementing the Financial Accounting Standards Board current expected credit loss (CECL) standard.
Moreover, the time delay would allow NCUA to direct additional time and resources toward modernizing its examination systems.
Board member McWatters and Chairman Hood voted for the proposal.
Board member Harper dissented to delaying the risk-based capital rule and voted no on the proposal.
Read the proposed rule.
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).
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).
Sunday, March 10, 2019
NCUA at the Crossroads
Drew Johnson, senior fellow at the National Center for Public Policy Research, recently wrote that decisions by the National Credit Union Administration (NCUA) have favored large credit unions at the expense of "a wilting number of small neighborhood credit unions committed to serving less-affluent Americans in underserved areas."
Johnson cited examples of how these large credit unions are straying from the mission of credit unions.
For example, he mentioned these large credit unions are buying commercial banks and the naming rights to arenas.
In addition, Johnson pointed out NCUA's proposal to give large complex credit unions subject to the agency's risk-based capital requirement the authority to raise capital from Wall Street investors. He argued this proposal will fuel the rapid growth of the largest credit unions and does nothing for small credit unions.
He also noted this proposal will change how these large credit unions operate. Johnson wrote: "Even if investors aren’t given board seats or a formal role in the management of the institution, a credit union’s CEO would be much more likely to listen to the concerns of hedge fund manager than those of a member with a personal checking account."
By kowtowing to the interest of the biggest credit unions, NCUA has fueled the consolidation of the credit union industry and reduced consumer choice.
Johnson stated the agency is at the crossroad. He called on NCUA to stop its questionable decisions, which favor these large credit unions.
The opinion piece appeared on Newsmax.com.
Read the op-ed.
Johnson cited examples of how these large credit unions are straying from the mission of credit unions.
For example, he mentioned these large credit unions are buying commercial banks and the naming rights to arenas.
In addition, Johnson pointed out NCUA's proposal to give large complex credit unions subject to the agency's risk-based capital requirement the authority to raise capital from Wall Street investors. He argued this proposal will fuel the rapid growth of the largest credit unions and does nothing for small credit unions.
He also noted this proposal will change how these large credit unions operate. Johnson wrote: "Even if investors aren’t given board seats or a formal role in the management of the institution, a credit union’s CEO would be much more likely to listen to the concerns of hedge fund manager than those of a member with a personal checking account."
By kowtowing to the interest of the biggest credit unions, NCUA has fueled the consolidation of the credit union industry and reduced consumer choice.
Johnson stated the agency is at the crossroad. He called on NCUA to stop its questionable decisions, which favor these large credit unions.
The opinion piece appeared on Newsmax.com.
Read the op-ed.
Thursday, December 20, 2018
NCUA to Fast Track Alternative Capital for CUs
The Credit Union Journal is reporting that the National Credit Union Administration (NCUA) may fast track a proposal to give complex credit unions access to alternative capital.
Complex credit unions have at least $500 million in assets and are subject to the agency's risk-based capital requirement, which will become effective on January 1, 2020.
The agency on December 13 approved a report calling for action on alternative capital by May of 2019.
Currently, only low-income credit unions have the authority to issue secondary or alternative capital.
While granting credit unions access to alternative capital will generate strong support from the credit union trade associations, the proposal, when issued, will also fuel vehement opposition from banking trade groups.
Alternative capital could become the Pandora's Box for credit unions. Once opened, it will become a curse for the credit union industry.
Read the story (subscription required).
Complex credit unions have at least $500 million in assets and are subject to the agency's risk-based capital requirement, which will become effective on January 1, 2020.
The agency on December 13 approved a report calling for action on alternative capital by May of 2019.
Currently, only low-income credit unions have the authority to issue secondary or alternative capital.
While granting credit unions access to alternative capital will generate strong support from the credit union trade associations, the proposal, when issued, will also fuel vehement opposition from banking trade groups.
Alternative capital could become the Pandora's Box for credit unions. Once opened, it will become a curse for the credit union industry.
Read the story (subscription required).
Friday, July 13, 2018
Subordinated Debt at LICUs Up 57 Percent, Since the End of 2016
Since the end of 2016, subordinated debt counting as net worth has increased by almost 57 percent or $84.4 million.
As of March 2018, total subordinated debt placed with low-income credit unions (LICUs) was $232.8 million. This is up from $148.4 million at the end of 2016.
A number of large LICUs have issued subordinated debt (the dollar amount in parentheses) since the end of 2016, including Advia Credit Union ($5 million), Self-Help Credit Union ($13 million), Self-Help FCU ($5 million), Carter FCU ($6 million), Jefferson Financial FCU ($11,597), and Notre Dame FCU ($12 million).
Carter FCU's issuance of subordinated debt was partially used to repurchase subordinated debt issued from the U.S. Treasury Department as part of the Community Development Capital Initiative.
The following table lists the 10 LICUs holding the most subordinated debt as of March 31, 2018.
It is my belief that this trend of large LICUs issuing subordinated debt will continue.
As of March 2018, total subordinated debt placed with low-income credit unions (LICUs) was $232.8 million. This is up from $148.4 million at the end of 2016.
A number of large LICUs have issued subordinated debt (the dollar amount in parentheses) since the end of 2016, including Advia Credit Union ($5 million), Self-Help Credit Union ($13 million), Self-Help FCU ($5 million), Carter FCU ($6 million), Jefferson Financial FCU ($11,597), and Notre Dame FCU ($12 million).
Carter FCU's issuance of subordinated debt was partially used to repurchase subordinated debt issued from the U.S. Treasury Department as part of the Community Development Capital Initiative.
The following table lists the 10 LICUs holding the most subordinated debt as of March 31, 2018.
It is my belief that this trend of large LICUs issuing subordinated debt will continue.
Monday, July 9, 2018
Advia Issued $5 Million in Subordinated Debt in Q2 2017
During the second quarter of 2017, Advia Credit Union (Parchment, MI) issued $5 million in subordinated debt with a 10 year term.
Advia Credit Union has a low-income designation, which allowed the credit union to raise secondary capital.
On September 1, 2017, Advia Credit Union acquired Peoples Bank (Elkhorn, WI).
While the issuance of subordinated debt and the merger are closely timed, this appears to be a coincidence.
According to Jeff Fielder, EVP of Finance at Advia Credit Union, "[t]he issuance of this debt was not a condition of the acquisition of Peoples Bank. However, our management team and board saw value in raising capital to reduce the minor dilution that would occur with the acquisition."
As of March 2018, the issuance of subordinated debt boosted the $1.7 billion credit union's net worth by almost 30 basis points.
In addition, Fielder noted that Advia saw value in diversifying its capital base, which would position the credit union for future growth.
Fielder further commented that the credit union, at this time, does not plan to issue any additional subordinated debt.
Going forward, more large, low-income designated credit unions will issue subordinated debt.
Advia Credit Union has a low-income designation, which allowed the credit union to raise secondary capital.
On September 1, 2017, Advia Credit Union acquired Peoples Bank (Elkhorn, WI).
While the issuance of subordinated debt and the merger are closely timed, this appears to be a coincidence.
According to Jeff Fielder, EVP of Finance at Advia Credit Union, "[t]he issuance of this debt was not a condition of the acquisition of Peoples Bank. However, our management team and board saw value in raising capital to reduce the minor dilution that would occur with the acquisition."
As of March 2018, the issuance of subordinated debt boosted the $1.7 billion credit union's net worth by almost 30 basis points.
In addition, Fielder noted that Advia saw value in diversifying its capital base, which would position the credit union for future growth.
Fielder further commented that the credit union, at this time, does not plan to issue any additional subordinated debt.
Going forward, more large, low-income designated credit unions will issue subordinated debt.
Monday, March 12, 2018
Notre Dame FCU's Highly Redacted Application for Secondary Capital
Notre Dame Federal Credit Union (Notre Dame, IN) issued $12 million in secondary capital with a maturity of 10-years during the fourth quarter 2017, according to its secondary capital application.
A Freedom of Information Act (FOIA) obtained copies of highly redacted initial and revised applications of the credit union and a copy of the National Credit Union Administration's approval letter.
The credit union stated that the secondary capital will be used to expand deposit and credit services of its members and its communities without curtailing expected future growth of the credit union. It will also assist the credit union in providing mission-related loans, such as zero percent holiday loans up to $1,000, favorable rates for first-time car buyer, and loans for home/appliance repairs up to $5,000.
The application redacts information on the ratio of qualified secondary capital to regular reserves plus retained earnings in 2017, but also the ratio in 2027 at maturity. However at the end of 2017, the ratio of qualified secondary capital to regular reserves plus retained earnings was 27.76 percent.
The credit union further stated that the issuance of secondary capital will strengthen its capital base. With the injection of secondary capital, the credit union's net worth ratio went from 8.06 percent at the end of the third quarter of 2017 to 9.74 percent at the end of 2017.
The National Credit Union Administration (NCUA) wanted to know how the credit union will repay its secondary capital at maturity. The credit union stated it would use liquid accounts at correspondent institutions and its available lines of credit. However, several lines of the application were redacted. This might suggest that the credit union will issue new secondary capital to repay maturing secondary capital.
The NCUA redacted information on how Notre Dame FCU will offset the cost of secondary capital. Also, there was no information on the cost of the secondary capital.
A Freedom of Information Act (FOIA) obtained copies of highly redacted initial and revised applications of the credit union and a copy of the National Credit Union Administration's approval letter.
The credit union stated that the secondary capital will be used to expand deposit and credit services of its members and its communities without curtailing expected future growth of the credit union. It will also assist the credit union in providing mission-related loans, such as zero percent holiday loans up to $1,000, favorable rates for first-time car buyer, and loans for home/appliance repairs up to $5,000.
The application redacts information on the ratio of qualified secondary capital to regular reserves plus retained earnings in 2017, but also the ratio in 2027 at maturity. However at the end of 2017, the ratio of qualified secondary capital to regular reserves plus retained earnings was 27.76 percent.
The credit union further stated that the issuance of secondary capital will strengthen its capital base. With the injection of secondary capital, the credit union's net worth ratio went from 8.06 percent at the end of the third quarter of 2017 to 9.74 percent at the end of 2017.
The National Credit Union Administration (NCUA) wanted to know how the credit union will repay its secondary capital at maturity. The credit union stated it would use liquid accounts at correspondent institutions and its available lines of credit. However, several lines of the application were redacted. This might suggest that the credit union will issue new secondary capital to repay maturing secondary capital.
The NCUA redacted information on how Notre Dame FCU will offset the cost of secondary capital. Also, there was no information on the cost of the secondary capital.
Friday, December 22, 2017
Notre Dame FCU Raises $12 Million in Secondary Capital
Notre Dame FCU (Notre Dame, IN) received $12 million in secondary capital from the newly formed CU Secondary Capital Fund (CUSCF).
CUSCF is a private vehicle created in a joint effort by CU Capital Market Solutions, LLC and Olden Lane Advisors LLC.
Notre Dame FCU is a low-income designated credit union. Low-income credit unions are authorized to issue secondary capital.
The $530 million credit union plans to use the proceeds to enhance its capital base, increase earnings through loan and deposit growth, and to fund its national expansion efforts.
This is the second credit union in recent months to raise secondary capital.
Read the press release.
CUSCF is a private vehicle created in a joint effort by CU Capital Market Solutions, LLC and Olden Lane Advisors LLC.
Notre Dame FCU is a low-income designated credit union. Low-income credit unions are authorized to issue secondary capital.
The $530 million credit union plans to use the proceeds to enhance its capital base, increase earnings through loan and deposit growth, and to fund its national expansion efforts.
This is the second credit union in recent months to raise secondary capital.
Read the press release.
Tuesday, November 14, 2017
Low-Income CU Secures $12 Million in Secondary Capital
Jefferson Financial Federal Credit Union (Metairie, LA) recently completed the first funding installment of its National Credit Union Administration-approved $12 million secondary capital plan.
The $563 million low-income credit union worked with CU Capital Market Solutions (CMS) of Overland Park, Kansas to develop a secondary capital plan, prepare its NCUA application and fund the capital.
The second installment of Jefferson’s secondary capital will be provided by CMS through an exclusive arrangement with CU Secondary Capital Fund.
Read the press release.
The $563 million low-income credit union worked with CU Capital Market Solutions (CMS) of Overland Park, Kansas to develop a secondary capital plan, prepare its NCUA application and fund the capital.
The second installment of Jefferson’s secondary capital will be provided by CMS through an exclusive arrangement with CU Secondary Capital Fund.
Read the press release.
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.
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.
Monday, January 23, 2017
NCUA Seeks Comment on Alternative Capital
The National Credit Union Administration (NCUA) Board issued for comment an advance notice for proposed rulemaking (ANPR) on alternative capitl for credit unions.
The NCUA Board is considering changes to the existing secondary capital regulation and whether to authorize federally insured credit unions to issue supplemental capital instruments that would only count toward a credit union’s risk-based net worth requirement.
The ANPR identifies two categories of alternative capital: secondary capital and supplemental capital.
The Federal Credit Union Act currently permits low-income credit unions to issue secondary capital. By law, secondary capital counts toward both the net worth ratio and the risk-based net worth requirement of NCUA’s prompt corrective action standards.
The Board is considering whether non-low income credit unions can issue supplemental capital to meet their risk-based capital requirement. Also, can low-income credit unions issue supplemental capital.
The ANPR seeks comment on a wide range of issues regarding alternative capital, including:
Over the coming months, I will comment on various aspects of the ANPR.
Read the ANPR.
The NCUA Board is considering changes to the existing secondary capital regulation and whether to authorize federally insured credit unions to issue supplemental capital instruments that would only count toward a credit union’s risk-based net worth requirement.
The ANPR identifies two categories of alternative capital: secondary capital and supplemental capital.
The Federal Credit Union Act currently permits low-income credit unions to issue secondary capital. By law, secondary capital counts toward both the net worth ratio and the risk-based net worth requirement of NCUA’s prompt corrective action standards.
The Board is considering whether non-low income credit unions can issue supplemental capital to meet their risk-based capital requirement. Also, can low-income credit unions issue supplemental capital.
The ANPR seeks comment on a wide range of issues regarding alternative capital, including:
- Associated regulatory changes that would be necessary;
- Potential tax implications related to issuing alternative capital, particularly for state-chartered credit unions;
- Potential director and management liability issues from issuing alternative capital;
- Investor protection issues and whether the sale of secondary capital, like supplemental capital, should be restricted to knowledgeable institutional investors;
- The impact of alternative capital on the mutual ownership structure of credit unions;
- Limiting the amount of supplemental capital issued by credit unions;
- Loss absorbing capacity of supplemental capital;
- The treatment of reciprocal holdings of alternative capital; and
- The application of securities law to both supplemental and secondary capital.
Over the coming months, I will comment on various aspects of the ANPR.
Read the ANPR.
Thursday, May 14, 2015
Supplemental Capital and Interdependency Risk
Low income credit unions can accept supplemental capital as part of their net worth and earlier this year National Credit Union Administration (NCUA) Chairman Matz stated that the agency would issue a proposed rule allowing complex credit unions to count supplemental capital as part of the numerator for their risk-based capital ratio.
However, since supplemental capital is available to absorb losses, NCUA has expressed concerns about the source of this supplemental capital. In other words, does this supplemental capital come from within the credit union industry or outside the credit union industry?
In its 2010 Supplemental Capital White Paper, NCUA wrote that "a supplemental capital structure which allows for investment between credit unions has the potential for increasing systemic risk within the credit union industry without actually producing new capital to buffer losses. The result is increased risk exposure to the NCUSIF without a corresponding increase in new capital."
Therefore, the NCUA needs to adopt measures to protect the credit union industry when credit unions invest in each other so as to minimize interdependency risk.
The simplest way to control for this risk would be to follow the standards set in NCUA's corporate credit union regulation regarding adjusted core capital. According to its corporate rule, if a corporate credit union contributes any capital to another corporate credit union, that corporate credit union must deduct an amount equal to this capital contribution when calculating its adjusted core capital.
But it is not clear whether NCUA has the authority to require such an adjustment via regulation for natural person credit unions.
However, since supplemental capital is available to absorb losses, NCUA has expressed concerns about the source of this supplemental capital. In other words, does this supplemental capital come from within the credit union industry or outside the credit union industry?
In its 2010 Supplemental Capital White Paper, NCUA wrote that "a supplemental capital structure which allows for investment between credit unions has the potential for increasing systemic risk within the credit union industry without actually producing new capital to buffer losses. The result is increased risk exposure to the NCUSIF without a corresponding increase in new capital."
Therefore, the NCUA needs to adopt measures to protect the credit union industry when credit unions invest in each other so as to minimize interdependency risk.
The simplest way to control for this risk would be to follow the standards set in NCUA's corporate credit union regulation regarding adjusted core capital. According to its corporate rule, if a corporate credit union contributes any capital to another corporate credit union, that corporate credit union must deduct an amount equal to this capital contribution when calculating its adjusted core capital.
But it is not clear whether NCUA has the authority to require such an adjustment via regulation for natural person credit unions.
Monday, March 23, 2015
Matz's Comment Undermines Integrity of Rulemaking Process
Despite being in the middle of the risk-based capital proposal comment period, National Credit Union Administration (NCUA) Chairman Debbie Matz announced on March 9 that the agency will issue later this year a proposal to count supplemental capital in full in its risk-based capital numerator.
This announcement seems to undermine the rulemaking process.
NCUA put out for a 90 day comment period its proposed rule with comments due by April 27.
As part of the risk-based capital proposal, the NCUA Board requested comments to several questions about supplemental capital, including "[s]hould additional supplemental forms of capital be included in the risk-based capital ratio numerator and how would including such capital protect the NCUSIF from losses?"
It appears that the agency has already made up its mind on this topic. It will count supplemental capital as part of the risk-based capital ratio numerator.
So much for seeking input from the public on this issue. This agency is making a mockery of rulemaking process.
The agency should have remained silent on this issue until the comment period ended.
Read the proposed rule.
Read Matz's speech.
This announcement seems to undermine the rulemaking process.
NCUA put out for a 90 day comment period its proposed rule with comments due by April 27.
As part of the risk-based capital proposal, the NCUA Board requested comments to several questions about supplemental capital, including "[s]hould additional supplemental forms of capital be included in the risk-based capital ratio numerator and how would including such capital protect the NCUSIF from losses?"
It appears that the agency has already made up its mind on this topic. It will count supplemental capital as part of the risk-based capital ratio numerator.
So much for seeking input from the public on this issue. This agency is making a mockery of rulemaking process.
The agency should have remained silent on this issue until the comment period ended.
Read the proposed rule.
Read Matz's speech.
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