CUNA Mutual Signs on First Credit Union for New Capital Notes Secondary Capital Program

MADISON, Wis. – Winthrop Federal Credit Union is the first to sign on to CUNA Mutual Group’s Capital Notes, a secondary capital tool designed to boost regulatory capital for low-income designated credit unions. Developed in late 2003, Capital Notes aims to assist eligible credit unions that are growing faster than the capital they need to satisfy regulatory requirements. “Current law mandates that credit unions, unlike other financial institutions, must rely on retained earnings alone to build capital to satisfy regulatory Prompt Corrective Action (PCA) requirements,” said Tom Merfeld, senior vice president of CUNA Mutual’s Credit Union Financial Solutions Group. “This puts most credit unions and ultimately their members at a competitive disadvantage because it dampens the credit union’s growth potential.” Corporate and low-income credit unions are the only exceptions, Merfeld said. Capital Notes will provide timely and much needed access to capital, said Joe Clark, president/CEO of $33 million Winthrop FCU, who added that their business plan calls for aggressive growth over the next five years. “Capital Notes will allow us to address the need for additional regulatory capital to support our expected growth,” Clark said. Merfeld said Capital Notes will be for terms of least 10 years and will be unrated, so credit union’s wouldn’t have to incur rating expenses. In a possible phase two of the rollout and “with greater volume expectations,” credit unions would issue unrated, unsecured notes into a trust and CUNA Mutual would then work with a rating agency to issue rated notes. The higher rated notes – AAA and AA- could be purchased by corporates. CUNA Mutual would likely retain much of the unrated or riskiest piece of the total, he added. The secondary capital program is also being encouraged as a solution for credit unions considering conversion to mutual savings banks by creating an instrument that addresses many of the concerns raised about alternate capital. “Namely, it ensures members’ ownership rights aren’t compromised, and maintains the philosophical integrity of the credit union,” said Larry Blanchard, CUNA Mutual senior vice president of corporate and legislative affairs. Since last year, more than two dozen credit unions have sought, or are seeking, bank charters, saying they are undercapitalized and that converting will allow them to raise much-needed capital. Other credit unions have pursued expanded fields of membership, but are also aware that aggressively recruiting new members may drag down their capital-to-assets ratio and raise the attention of regulators. Several credit union trade associations and regulatory agencies are working closely with Congress to address capital issues, Blanchard said. NASCUS continues to work to raise awareness of the secondary capital issue and is keeping an eye on developments at the state level. In early 2001, CUNA’s Renaissance Commission identified access to alternative, or secondary, capital as a must-do task for credit unions. NAFCU, the California Credit Union League and several other state leagues continue to talk with Congress about secondary capital and the Filene Research Institute has argued for changes in the rules governing credit union capital and mechanisms credit unions could use to obtain secondary capital. By the end of August, the Government Accountability Office (GAO) is expected to deliver a study on credit union capital that could be used by lawmakers to modify current legislation. For now, Capital Notes is only available to low-income credit unions, which now total nearly 1,000, Blanchard said. Section 701.34(a)(2) of the NCUA Rules and Regulations defines low-income credit unions as credit unions in which a majority (50.1%) of members make less than 80% of the average for all wage earners as established by the Bureau of Labor Statistics, have an annual household income that falls at or below 80% of the median household income for the nation as established by the Census Bureau, or are enrolled as full-time or part-time students in a college, university, vocational, or high school. Contract language for Capital Notes specifically indicates that debt is subordinated and does not impact members’ cooperative ownership of the credit union, Merfeld said. It also avoids potential abuses in sales to unsophisticated investors, because sales of the notes are limited to institutional investors and not consumers. CUNA Mutual purchases the note for its own investment portfolio. “CUNA Mutual is working with several other healthy, fast-growing credit unions that are interested in this instrument and are already legally eligible for secondary capital. We applaud Winthrop Federal Credit Union and Joe Clark for being early partners with us in our pilot,” Blanchard said. [email protected]