OAKLAND, Calif.-In an experiment being watched by credit unions across the country, North Carolina's Center for Community Self-Help is building a community development credit union in California funded by secondary capital provided by one of its affiliates, the Self-Help Ventures Fund.
The community development organization, which obtained a federal credit union charter in 2008, began a string of four deals for undercapitalized California CUs that have been combined to create a $165-million credit union. During that time the deficit in capital has been filled in by almost $40 million in uninsured secondary capital provided by Self Help Ventures Fund, according to Martin Eakes, head of the Self-Help organization.
Because low-income-designated credit unions such as Self-Help FCU are permitted to count secondary capital as net worth, the capital contribution has solidified the conglomeration of the four troubled credit unions. Without the secondary capital the conglomeration would have $4.2 million of regular reserves and undivided earnings, for a 2.5% net worth ratio. With $39.5 million of uninsured secondary capital the CDCU start-up has a whopping $43.8 million of net worth-or 27%.
Currently about 1,500 credit unions that are designated as "low-income" by NCUA are eligible to raise secondary capital and to count it as net worth under the agency's minimum capital rules, known as Prompt Corrective Action. But the credit union lobby is asking Congress to expand powers to raise secondary capital to all federally insured CUs.
The Center for Community Self-Help has grown into a CDCU conglomerate that operates the state-chartered Self-Help CU, a $500-million North Carolina credit union, the Self-Help Ventures Fund, the consumer lobby the Center for Responsible Lending, as well as the start-up CDCU in California.
Eakes said without the contribution from the venture fund it would not be able to embark on the West Coast project, which has combined People's Community CU in Oakland, Community Trust CU in Modesto, El Futuro CU in Porterville and Kern Central CU in Bakersfield. "We are able to continue service to members in communities that might otherwise lose it," Eakes said. "This provides support for low-income credit unions and communities in California," said Eakes. "Otherwise, we would be able to support it."
The secondary capital is provided from Self-Help Ventures Fund's reserves, which amount to almost $300 million, and from foundations that have helped finance Self-Help projects in the past. Because the secondary capital accounts are provided by non-profits they are paid a below-market rate. But in proposals in Congress CUs would attract secondary capital by offering above-market rates. Under NCUA rules the secondary capital accounts must be available to absorb losses before the National CU Share Insurance Fund, must have a minimum term of five years, the holder cannot pledge to any third parties, and they must be uninsured.
