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SAN DIEGO – Secondary capital, a popular resource other financial institutions are turning to, may be the solution for fast-growing credit unions to meet member needs while satisfying regulatory requirements, says one industry expert. On May 18, Tom Merfeld, CUNA Mutual Group senior vice president, told attendees of the 10th Annual CFO Council Conference and Roundtable that secondary capital can provide healthy credit unions an alternative capital source that will help them grow and better serve members, without diminishing members’ governance rights. Secondary capital numbers work for a fast-growing credit union, Merfeld told about 30 attending his breakout session. If a credit union’s growth is hampered by thin levels of capital, this alternative source may make sense, he said, adding it allows the CEO, the board and management team to respond to member needs without worrying about the numbers. Merfeld said that secondary capital can also provide competitive equity between credit unions and other institutions; remove a reason often cited for credit unions’ conversions to banks; allow credit unions to recapitalize themselves out of near-prompt corrective action status; and protect the share insurance fund. He spent much of his presentation helping CFOs determine if secondary capital might be right for their credit unions by using a spread-sheet analysis to illustrate how a credit union can meet member needs and increase earnings. “It may seem like the cost is high, but it enables credit unions to meet member needs and grow earnings at the same time,” he said. Currently, NCUA-designated low income credit unions can include secondary sources in the capital calculation for PCA purposes. “It is (secondary capital) often structured as subordinated debt for GAAP reporting purposes, but can count as capital under regulatory accounting principles,” Merfeld said. “This is what low-income credit unions have available to them.” On risk-based capital versus secondary capital, Merfeld said: “There are complementary issues. Risk-based capital is a richer measure of the capital strength of the credit union, whereas secondary capital is a tool to increase the capital strength of a credit union.” Leagues, trade associations and other industry leaders are working through legislative channels to help make secondary capital available to all credit unions. If granted, Merfeld said CUNA Mutual would make its secondary capital program – now offered to low-income credit unions – available to all qualifying credit unions facing the capitalization squeeze. CUNA Mutual’s Capital Notes secondary capital program would utilize a trust. Credit unions would issue unrated, unsecured notes that the trust would then purchase. The trust would then go through a ratings process and issue its own notes that institutional investors, such as corporate credit unions, CUNA Mutual and other insurance companies, could purchase, Merfeld explained. “Secondary capital is a way to level the playing field for credit unions, allowing them to better compete, and it can be structured to complement the cooperative nature of credit unions,” he said. [email protected]

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