What is Secondary
Capital?
Secondary Capital is a
“subordinated” loan. This means
that, in the event of liquidation, all other debt owed by a credit union must be
repaid before the secondary capital loan is repaid. Although it is a loan, it counts as net
worth for regulatory purposes, because it is available to cover any insolvency
of the credit union. A Secondary
Capital investment strengthens the capital of the credit
union.
What are the advantages of Secondary
Capital Loans compared to Deposits?
According to NCUA Rules and
Regulations [Section 702.2(f)], a low-income designated credit union may count
Secondary Capital loans as part of Net Worth when calculating the Net
Worth-to-Total Assets ratio for compliance with Prompt Corrective Action
(PCA). A deposit, on the other
hand, will increase assets and not increase net worth, therefore lowering
the Net Worth to Total Assets ratio.
Who is eligible to borrow
Secondary Capital Loans?
Only credit unions designated as
low-income by the National Credit Union Administration (NCUA) may borrow
secondary capital. The NCUA also
requires that a credit union file a plan on how it will use the Secondary
Capital funds.
Who is eligible to lend
Secondary Capital?
Organizations, institutions, and
corporations, whether non-profit or for-profit, can make these loans to credit
unions. Individuals are not
permitted to make Secondary Capital Loans to credit
unions.
Does NFCDCU have any specific requirements
of Secondary Capital Loan applicants?
In order to be eligible for a
Secondary Capital loan from NFCDCU, a credit union must:
What are the normal terms for
secondary capital loans?
Presently, we make secondary capital
loans on these terms:
What are the advantages of Secondary
Capital compared to Equity Grants?
Given a choice, most credit unions
would rather have equity grants, which do not have to be repaid and which do
count as Net Worth. However,
investors often have less funding available for equity grants than they do for
secondary capital – so usually secondary capital investments are much larger
than equity grants.
If I obtain a secondary capital loan
from the National Federation, does this mean that I can’t get an equity
grant?
No. In fact, the National Federation of
Community Development Credit Unions has a limited pool of equity grant funds
that may be awarded in combination with Secondary Capital loans. You
don’t have to apply separately for these grants, if you are submitting a
Secondary Capital application.
How do I account for a Secondary
Capital loan?
When you receive a secondary capital
loan for more than five years – say, of $250,000 – all of it counts as capital,
until the time to maturity decreases to five years. So, when the money is received by the
credit union, the accounting entries should be:
Debit – Cash
Credit - Uninsured Secondary
Capital.
When there are only five years to
maturity, you take 20% of the original entry – in this case, $50,000 – and
reverse it out. The entries at that
time are:
Debit - Uninsured Secondary
Capital
Credit - Subordinated
Debt
So, at this point in time, only
$200,000 counts as Net Worth, while the other $50,000 counts simply as a
subordinated loan. Each year, you
repeat these entries. So when you
have less than one year to maturity, all $250,000 counts as a subordinated loan,
and none counts as secondary capital any longer.
Why is it that the amount I can
count as capital keeps decreasing and can’t be counted as Net
Worth?
This structure was the only one NCUA
would approve. The intent of NCUA
is to make sure that you keep building up your primary capital during the period
of the secondary capital loan, so you won’t depend on secondary
capital.
Are there any other advantages to
Secondary Capital?
A bank that makes a secondary
capital loan to your credit union may be able to get a much higher dollar amount
of credit under the Community Reinvestment Act (CRA). (Please see our reference information on
this topic.)
What is required in order to
apply for a Secondary Capital Loan?
Complete
and send in an application form and include:
-
amount,
and the proposed use of the funds
-
most
recent NCUA Form 5300 and most recent financial statements since last Form
5300
-
last
two annual financial statements
-
a
three- to five-year business plan
-
a
description of the credit union’s history and past
performance
-
expected
impact of the investment
-
plans
for growth, for introduction of new products, and for attraction of new
members
-
three
to five year financial projections
-
copies
of recent Letters of Understanding and Agreement and Documents of
Resolution
-
copy
of most recent Lending Policies
-
copy
of Delinquency and Collections Policies and
Procedures
That sounds like a lot of
work. Can I get help completing the
application?
The National Federation’s Technical
Assistance Department is available to advise you at no cost.
Staff Contact List
If approved, what documentation does
the Credit Union and NFCDCU sign?
The documentation we require is a
loan agreement (which is signed by the credit union and NFCDCU), and a
promissory note (which the credit union signs). Also, the NCUA requires that the lender
of a Secondary Capital Loan sign a “Disclosure and Acknowledgement” form that
specifies the conditions of the loan. This form is kept on file by the Credit
Union and made available to the NCUA examiners.
What kind of reporting is required?
All
credit unions that receive Secondary Capital from the National Federation must
complete quarterly narrative reports.
