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Prepare for Growth in 2023

February 21, 2023
By Mark DeBree, CFA, Catalyst Strategic Solutions Managing Principal

As 2023 unfolds, credit unions remain focused on expansion and growth, even though liquidity has tightened, and share growth has slowed. While near-term growth may be difficult to achieve, market indications suggest that share growth will rebound later in 2023 or early 2024. Strategically, this means that you should be preparing now for how to support and capitalize on this upcoming growth without adding pressure to net worth.

Thus far in 2023, we have seen a number of credit unions prepare for the expected deposit growth by positioning themselves to issue subordinated debt.  We have heard “we don’t have the funds to support the growth right now”, and while that may be the case, subordinated debt issuance takes time and it is best to be prepared for “when the time is right”. Expanding on this, there are reasons to get ahead of the game and work on your approval now rather than putting it off until later. For starters, you are not required to issue immediately upon being granted approval. Once approved, credit unions are extended a two-year window in which to issue and accept funds. This means you can choose the time that best aligns with your credit union’s strategic plan to raise these funds.

The second significant reason to start the process is that subordinated debt approval and issuance should be viewed as a journey that can require time and effort to accomplish. The ability to issue requires the regulatory approval of a formal application. While Catalyst Strategic Solutions has been extremely successful in supporting credit unions through the application process (Catalyst has successfully received approvals for all of the applications it has helped credit unions write), there are certain steps that cannot be by-passed, such as the regulatory review of your application. These take time and are best planned in advance, instead of waiting to start the process when you would rather be issuing.

In engagements with credit unions, Catalyst Strategic Solutions can complete an application in as little as a few weeks, but that does not mean that you are instantly granted authority. Upon completion of the application, it must go to your examiners (federal and state if you are a SCU), and this regulatory review can easily take 60 days; meaning there are almost two months of dead time that we must account for. All in all, you should plan for about 3-4 months between the start of any engagement and the letter of approval from your examiners.

The final key reason to start now is the speed to action. When market conditions present an attractive issuance opportunity, you will want to be in position to act quickly rather than to begin the application and approval process. 

If you find yourself pushing this off because you are one of the credit unions that applied for the second round of U.S. Treasury Emergency Capital Investment Program (ECIP) funds in January, your credit union will also be required to obtain NCUA approval for regulatory net worth treatment. Something to consider with ECIP, the total awarded funds are expected to range between $160 million and $340 million. This may mean that your credit union may not be awarded the full amount requested from U.S. Treasury. To head off this unknown, many credit unions are crafting regulatory applications to enable them to pivot and raise additional funds from direct investors to offset any potential shortfall from U.S. Treasury funding.

As we look ahead, many of us continue to have net worth pressure and find liquidity to be a challenge. If we look ahead to deposit inflows as the solution to your liquidity challenges, you will find yourself still staring at net worth pressures. Subordinated debt is a valuable tool available for credit unions, which allow us to raise external funds that can be counted towards regulatory net worth. 

Preparing for the future and the ultimate inflow of liquidity is critical. Getting ahead of the game and starting the application process with Catalyst Strategic Solutions now will position you to issue subordinated debt when the time is “right.” Contact us today to get started.