Credit Union's Capital Raise Should Make Bankers Nervous
A Louisiana credit union just reeled in what is believed to be a record amount of
Jefferson Financial Federal Credit Union in Metairie said on Nov. 13 that it had
received the first installment of a planned $12 million capital infusion. The
amount is so large that the firm that handled the injection believes it to be the
largest ever for a credit union.
At the very least, it represents roughly 7% of all secondary capital held by credit
unions, based on data from the National Credit Union Administration.
The $563 million-asset credit union’s groundbreaking deal —and the prospect of
more like it in the months ahead — is certain to further incense banking groups
that earlier this year pursued litigation in hopes of challenging moves by the
NCUA to loosen regulations governing fields of membership and member-
“The ever-expanding list of permissible activities of credit unions is a continuing
source of frustration to community banks everywhere,” said Ron Samford, the
CEO of the $381 million-asset Metairie Bank, which competes against Jefferson.
“Not paying income taxes, making C&I loans, including anyone who breathes in
the membership ranks, and now, raising capital — how many perks does an
industry need to stay ahead of the competition from community banks?” Samford
While the NCUA has been mulling ways over the past year to expand credit
unions’ access to outside capital, low-income designated credit unions such as
Jefferson have had the authority to raise secondary capital since 1996. Through
June, however, fewer than 100 low-income credit unions out of more than 2,000
had secondary capital on their books.
“There has always been an interest in secondary capital among low-income
designated credit unions,” said Mark Rosa, Jefferson’s CEO. “Knowing where to
start may have kept credit unions from proceeding.”
Rosa credits an effort by CU Capital Market Solutions, an Overland Park, Kan.,
credit union service organization, for spurring credit unions to seek secondary
capital. The firm, which brokered Jefferson’s deal, has arranged more than $100
million of secondary capital for credit unions.
Adding capital is a big deal for Jefferson, which has grown at a sizzling pace
since late 2015, adding assets at a clip that has eclipsed the increase in its net
worth. As a result, its net-worth ratio has plummeted by more than 100 basis
points, falling to 9.14% on Sept. 30. Absent the new capital, Jefferson would
almost certainly have been forced to hit the brakes on its expansion.
As with mutual banks, credit unions primary source of capital is retained
earnings. Credit unions must maintain a retained-earnings ratio of 7% or more to
be considered well-capitalized.
“The rationale for [secondary] capital was to provide asset growth to expand both
loan and deposit opportunities for my members, drive down my efficiency ratio
and accelerate earnings,” Rosa said. “Without it, my asset growth would have to
Unlike banks, which face few restrictions to raise capital, credit unions must draft
detailed plans demonstrating how they intend to use the funds and obtain NCUA
approval every time they want to approach investors. In Jefferson’s case, the process took about three months, said Ron Colvin, CU Capital Market Solutions’ chief strategist.
“The development of a capital plan and the submission of an application is a very
comprehensive an intricate process requiring a thorough knowledge of the
institution and its needs, the regulations and how they all interconnect,” Colvin
said. “Every aspect of Jefferson’s model was evaluated and then developed over
The daunting prospect of “navigating and applying all the regulations” has likely
deterred many credit unions from seeking secondary capital, Rosa said. That is
what makes Jefferson Financials’ deal so important for credit unions and
worrisome for banks. Just knowing an impactful transaction is possible is likely
serve as an eye-opener for credit unions straining to underwrite breakneck
growth trends, experts on both sides of the issue believe.
Even bigger changes could be just over the horizon. Earlier this year, the NCUA
issued a notice of proposed rule making on capital alternatives, which received
more than 750 comment letters. While there was broad support for increased
access to investor capital among credit unions, bank groups panned the idea.
CU Capital Market Solutions CEO Lew Lester downplayed criticism from banking
advocates, claiming that increased use of secondary capital could create an
investment opportunity for banks since credit unions can only seek funds from
institutional investors and other financial institutions. Banks could also receive
Community Reinvestment Act credit for investing, he added.
One bank seriously considered participating in Jefferson’s capital raise, citing the
income and CRA credit opportunities, before the proposal was scotched by its
board, Rosa said. He declined to name the bank.
“I suspect the idea ... caused anxiety to some” directors, Rosa added.
Jefferson’s new capital takes the form of a 10-year note, with interest payments
only during the first five years, and 20% reductions in principal during each of the
That structure could create problems for institutions that don’t manage their
capital carefully, said Keith Leggett, a retired American Bankers Association
economist who writes frequently about credit unions.
“Secondary capital is not high-quality capital,” Leggett said. “It has a maturity.
Retained earnings are still credit unions’ only source of permanent capital.”
By John Reosti
November 17, 2017