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Growth Planning Is Best Reason For Secondary Capital
ALEXANDRIA, Va. (8/1/13)--Secondary capital basics, and practical tips on how eligible low-income designated credit unions (LICUs) can best use their secondary capital authority, were among the topics discussed in a Wednesday National Credit Union Administration webinar.

The LICU designation brings benefits that include the ability to offer and accept secondary capital accounts.

The secondary capital must take the form of subordinated debt--a borrowing transaction that must be repaid over time, if the funds are not used to cover operating losses, according to the NCUA. Eligible LICUs are subject to borrowing limitations and capitalization requirements, and their secondary capital plans must be approved by the NCUA.

Using secondary capital to create breathing room for credit unions experiencing temporary financial issues is the most common use, and obtaining secondary capital in anticipation of profitable growth is the best use, the NCUA said.

However, the agency warned, credit unions should not use secondary capital to stave off prompt corrective action orders or to hide ongoing business model problems in a credit union. The agency said this is the worst use of secondary capital.

The costs of secondary capital can be high, the NCUA said, with net worth and liquidity issues being frequent landmines. Anticipated growth also may not occur as quickly as the credit union had hoped, the NCUA added. The NCUA during the webinar also emphasized that secondary capital is not a substitute for deposits because it bears a higher interest rate reflecting its longer term and higher risk. The NCUA slides also noted that secondary capital cannot be used like a grant. It is a loan which must be paid back, the agency said.

Secondary capital can be accepted from other credit unions, investors, the National Community Investment Fund, the National Federation of Community Development Credit Unions, the U.S. Treasury's Community Development Financial Institutions Fund, investment conduits and other sponsors.

Secondary capital accounting tips were also addressed during the webinar, including details on how secondary capital should be treated during a merger. Basic scenarios for credit unions that have taken on secondary capital were also discussed.

Nearly one-fourth of credit unions that took part in the webinar said they were considering using secondary capital within the next five years. Nearly 25% of credit unions that attended the webinar had net worth ratios above 10%, and 38% had new worth ratios between 7% and 10%. Around half of the webinar participants were low-income-designated credit unions.

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