California credit union aims to be test case for divisive capital rule

Greg Mitchell gets why bankers object to letting more credit unions issue subordinated debt.

Mitchell, president and CEO of First Technology Federal Credit Union in San Jose, Calif., was a community banker for more than a decade, leading California National Bank and First PacTrust Bancorp before accepting his current job. He’s heard the arguments about credit unions having an advantage because of their tax-exempt status.

Still, Mitchell is convinced that large, well-run credit unions like the $14.4 billion-asset First Technology should be able to obtain credit ratings and turn to institutional investors such as insurers for capital. And he asserts that there is enough money out there to avoid hyper competition with banks.

Credit unions like First Technology could then “go to the market and raise the debt for appropriate purposes when they’ve got a real story for the use of proceeds and ability to repay,” Mitchell said.

“I think there’s an appetite” for sub debt, said Mitchell, who would like to see bigger credit unions pool their issuances. “There’s a lot of money out there that would buy into an investment-rated issue with a reasonable yield.”

To that end, Mitchell is willing to have First Technology serve as a test case for issuing debt, even if it means becoming a lightning rod for bankers.

For nearly 25 years, the National Credit Union Administration has limited the use of subordinated debt to low-income credit unions. While they make up more than half of the 5,133 credit unions in operation, low-income institutions had just $345 million secondary capital on their books on Sept. 30.

That could all change on Thursday. The NCUA is prepared to vote on a proposed rule that would permit more credit unions with more than $500 million in assets, or roughly 285 institutions, to issue subordinated debt.

Industry experts believe First Technology and other large credit unions will likely find a receptive market.

“I think there will be demand for credit union subordinated debt” as investors search for higher returns, said Van Hesser, chief strategy officer at Kroll Bond Rating Agency.

“We’ve had this very much on our radar screen,” Hesser added. “Given our strength in the community bank space, it’s not a big leap for us to look at other sub sectors in financial institutions that have the ability to tell a solid, credit-worthy story.”

Banks, for the most part, aren’t keen on competing for investor capital.

James Kendrick, first vice president of accounting and capital policy at the Independent Community Bankers of America, also warned in a comment letter to the NCUA that access to sub debt would allow credit unions to “balloon their balance sheets” with assets that could cause trouble during an economic downturn.

Mitchell said credit unions are not asking for special treatment, just the opportunity to use a capital tool already available to banks.

“All we’re creating is parity with what banks already have,” Mitchell said.

Mitchell has experience with outside investors. He became CEO of First PacTrust in November 2010 when COR Capital, a group led by financier Steven Sugarman, recapitalized the Irvine, Calif., company.

Mitchell briefly served as co-CEO of First PacTrust with Sugarman before leaving in October 2012. He would quickly take the top job at First Technology, while Sugarman rebranded First PacTrust as Banc of California.


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