Total outstanding subordinated debt at U.S. credit unions surged above $1 billion in the first quarter — another record high — as the industry increasingly looks to the capital source to fund growth.
Credit unions added $159.0 million in subordinated debt in the first quarter. As a result, total subordinated debt for the industry stood at $1.11 billion in the first quarter, a slight jump of 16.7% quarter over quarter but a surge of 127.1% year over year.
Historically, credit unions largely relied on retained earnings to fuel growth given their limited funding sources compared to banks. But now, credit unions are increasingly viewing subordinated debt, which is one of the only options for growing capital outside of retained earnings, as an attractive option for funding both organic and inorganic growth, Peter Duffy, a managing director at Piper Sandler, said in an interview.
"It's now an option that changes the dynamic of how [credit unions] view growth," he said. "If you know that you can get more growth than that current earnings generation allows you, issuing secondary capital solves for that and gives the institution an opportunity to capitalize on the growth that they normally would not have been able to."
Credit unions' reasons for raising subordinated debt "run the gamut" from things like M&A, branching, technology investments or lending in low-income areas, Duffy said.
Subordinated debt and M&A
Of the top 10 credit unions with the most outstanding subordinated debt as of March 31, three — GreenState CU, Georgia's Own CU and Alabama CU — have announced at least one bank purchase in the past 12 months. GreenState CU, which had the third-most total outstanding subordinated debt at March 31, announced three bank purchases in 2021.
VyStar CU raised $200 million in subordinated debt in the first quarter, the largest single raise by a credit union yet. The raise, which makes up 17% of VyStar CU's net worth, boosted the credit union's net worth ratio by almost 2% quarter over quarter.
VyStar CU issued the subordinated debt to "further enhance its already strong capital position" and fund organic growth initiatives to support its members and communities "without compromising financial stability or diluting net worth," President and CEO Brian Wolfburg wrote in a statement to S&P Global Market Intelligence.
The capital raise may also have been related to VyStar CU's now terminated acquisition of Heritage Southeast Bank by boosting the credit union's net worth ratio to remain well above regulatory standards had the $194.4 million deal closed. A recent analysis by S&P Global Market Intelligence based on VyStar CU's first-quarter call report data found that without the capital raise, VyStar CU's net worth ratio was likely to take a hit and possibly drop below 8% had the Heritage Southeast deal closed, due to the size of the bank target and the credit union's significant growth since the deal was announced.
The companies terminated the transaction June 15.
