In the financial landscape, where innovation meets tradition, credit unions have found a powerful tool in subordinated debt to fuel growth, impact, and community support. Today, we delve into an insightful discussion featuring Todd Fanning, CFO and Interim CEO (September 2023- February 2024) of GreenState Credit Union, and Mike Macchiarola CEO of Olden Lane, exploring the transformative journey of subordinated debt in the credit union sector. 

The Evolution of Secondary Capital in Credit Unions 

Subordinated debt, or secondary capital, has evolved from a niche financial instrument to a significant growth enabler for credit unions. Initially used as a lifeline for struggling institutions, its purpose has expanded to support ambitious growth strategies and significant community impact projects. This evolution reflects a broader shift within the credit union movement towards more innovative and impact-driven financial solutions. 

  • Strategic Growth through Secondary Capital GreenState Credit Union’s journey from seeking secondary capital as a regulatory cushion to leveraging it for strategic acquisitions highlights the potential of subordinated debt to support aggressive growth plans while maintaining healthy capital ratios. 
  • Impact Investing with a Social Focus The pioneering issuance of a $100 million social bond by GreenState, aimed at supporting minority homeownership, underscores the potential of subordinated debt to not only fulfill financial goals but also drive substantial social impact. This initiative demonstrates how credit unions can align financial strategies with community-focused missions. 
  • Navigating Regulatory and Market Challenges The conversation sheds light on the regulatory landscape and market dynamics affecting subordinated debt issuance. It highlights the importance of partnering with knowledgeable financial advisors to navigate these complexities and capitalize on opportunities in the evolving interest rate environment. 

Embracing the Future with Confidence and Innovation  

  • The Transformational Power of Secondary Capital Discover how subordinated debt has transformed from a financial stopgap into a strategic tool for growth and community impact. 
  • Crafting a Successful Social Bond Initiative Gain insights into the process and strategic thinking behind GreenState’s groundbreaking social bond issuance, and the broader implications for impact investing in the credit union sector. 
  • Future Trends and Opportunities Explore the evolving landscape of subordinated debt, including the role of regulatory foresight, market positioning, and the importance of financial innovation in securing the future growth and resilience of credit unions. 

We invite you to listen to the full episode and join us in exploring how subordinated debt can open new horizons for your credit union. Together, let’s chart a path towards a future marked by growth, impact, and unwavering commitment to our communities. 

Michael Macchiarola, Todd Fanning, GreenState Credit Union and Olden Lane are not affiliated with or endorsed by ACT Advisors, LLC.  

Audio Transcription (pulled from the podcast)

Doug English  00:28  

Welcome back to CU On the Show. I’m Doug English and today, I’m very excited to have Todd Fanning the CFO of GreenState Credit Union. And Mike Macchiarola from Olden Lane. So thanks, guys. Thanks for joining me today.  

Todd Fanning  00:42  

Glad to be here, Doug.  

Doug English  00:43  

We’re going to talk about secondary capital, and the uses that GreenState has had for secondary capital over the last few years. But first, we work with credit unions. And in credit unions, there is an emotional connection. There’s this usually this foundational moment, when you became aware of what’s so special about this credit union movement. Todd, let’s start with you what caused you to start working at a credit union?  

Todd Fanning  01:07  

Well, it’s a little bit of a backwards story in that I worked for a community bank for twenty-one and a half years prior to coming here. And I can tell you, where I worked, credit unions were the bad guy, because they were viewed as competition that could offer lower rates because they didn’t pay taxes. And so it was referred to as the dark side, when the bank that I worked for went under, I had a great opportunity to join GreenState and quickly found that the credit union side is the good side. It’s not the bank side, because banks are focused on the shareholder and profits. Credit unions are focused on the members and changing lives. And that has resonated obviously with me, and I’ve been here now almost 12 years.  

Doug English  01:54  

Very good. Well Mike, how’d you get started working with credit unions.  

Michael Macchiarola  01:57  

Well, I have a history as a Wall Street lawyer, a Wall Street trader, and then a professor. And then I left my professorship to settle with a group of folks because we thought that there were some underserved pockets. Most notably, credit unions were underserved in terms of capital market expertise. And so several guys with that kind of pedigree got together, and we launched Olden Lane in 2017 or so the first thing we did was sell a package of municipal bonds to a couple of credit unions. And then we really dove into the regs and said, what else can we do? Quickly, we moved into secondary capital, which was at the time which has become obviously subordinated debt. It’s been the best thing ever happened. I mean, it’s the intersection of the skills which I’ve been trained in, but really with a heart, because everything at the end of the night goes to a member, as Todd said, you know, everything equates to a loan for someone who really needs it somewhere in America. And that’s really satisfying to do from a coverage standpoint.   

Doug English  02:56  

It is. So, talk us through my talk is through the growth in subordinated debt. I know that we’ve talked before on this podcast about the fact that when January of 2022, the complex credit unions were able to begin issuing subordinated debt, and I assume that really accelerated the market from that point, talk us through the numbers.   

Michael Macchiarola  03:16  

There’s a couple things in the numbers. If you go back and you look at the size of the market, the original secondary capital rule goes to 1996. There’s a period of time for the first decade or so when it was used in a very limited fashion almost by micro credit unions to triage or to fix potholes, if you will. It’s only after that when Debbie Mattes as the Commissioner really focused on potentially using it as growth and she studied that market pretty intently. There was a government program after the Great Recession, which put some money into federal money into some credit unions, which was technically secondary capital, but it’s really only in like 2018 or so that the market really starts to have legs and that’s really when Olden Lane looked at it around that time it was about 150 million of outstanding capital. Just to give you the size and shape of what’s happened since, at the end of 2020, the market was under half a billion dollars, there were 78 issuers, and the average size of an offering of an outstanding amount of capital was about 5 million. That number now is just under 4 billion at last year’s year end, there’s 166 issuers, and there’s 23 million on the average outstanding size at a credit union. So we’ve seen an eight fold increase in outstanding amounts, we’ve doubled the number of issuers, and we’ve seen a very pronounced maybe five times or so increase in the average size of an offering.  

Doug English  04:46  

Yeah, and along that way from 2020 to 2023. My goodness, the differences in the interest rate environment, the Depository environment that credit unions experience just incredibly different. Wow. As the market has developed, what uses have credit unions made for subordinated debt? And how has that changed? If you can address that either of you? Talk me through that.  

Michael Macchiarola  05:13  

I think it’s become a little bit more sophisticated, right. As I said, I think we clumsily walked around in the early days. And it was used more to help somebody who had fallen on tough times or to absorb a loss. If you go all the way back to what the intent of it was, it was really twofold it was number one to give you risk absorbing capacity. So that’s certainly in line with what was intended. But at the same time, because it was pushed to low income credit unions initially, it was intended to allow them to either achieve or maintain a prudent level of capital, that they could get to more quickly than if this was not available. And the intent there was a good one, and in line very much in line with both LICU status and the movement in general, which was to get more money out to folks in need. Interestingly enough, the growth is also correlated with a growth in the low income status. So if you go back to 2018, or so only about a third of credit unions had that status. Now it’s well north of half, either by count or by dollar amount. Some of that is consolidation. But number two, is people are seeking out that status. And the way to get that status is to really attend to the needs of certain communities. So it’s a good thing generally, and it’s in line with what this movement should be about.  

Todd Fanning  06:41  

And that’s exactly how we first became involved, we became low income designated in 2013. And we have traditionally run capital, just above the regulatory requirement, from the standpoint that we grew so rapidly. And so that’s how we first became involved in the program was trying on our own to get secondary capital, because we were a low income, designated credit union.  

Doug English  07:06  

So that’s what it started out as it was triage. And then when, when you’re growing, how do you how does that change? Do you use it in a different way?  

Michael Macchiarola  07:14  

Well, as a general growth tool, what happens to credit unions because of the capitalization of a credit union, as Todd alluded to earlier, you don’t have traditional stock. And you really don’t have other than this mechanism, a way to issue debt. So if you were going to expand your operation, or you were trying to grow quickly, there’s a governor on your growth. And that governor really is the amount of retained earnings you have and have kept. You know I tell my children, if JP Morgan wants to grow their branch network, they can issue stock or issue debt, and they can raise funds and go out and build branches all over the country. Like they recently announced that they’re going to. A credit union is a little bit has a little bit less on its menu in terms of being able to support that growth, it really over time has had to stack up earnings and then can use those earnings. But when it runs out of earnings, or those earnings are topped, as Todd alluded to, with your capital restraint and your ability or your desire to remain well capitalized or a cushion above that, you kind of can chew through your earnings very quickly and your growth is therefore limited. Sub debt or secondary capital as it was at the time is more logs on that furnace, if you will, in allowing you to grow quicker. As long as you do it responsibly, you’re not doing anything that’s risky per se. But you are increasing your ability to grow faster. Ultimately, you’re servicing more people. And if you do it, well, you’re using that sub debt over time and replacing that earning stack. By the time you repaid the sub debt, you’ve replaced it with earnings that that sub that is enabled.  

Doug English  08:56  

It’s an interesting thing to think about the cost of capital internal to a credit union, versus the cost of capital through an issuance. Is there any data around that? Or have you guys seen, what is the difference between those two things? And how do you decide when to go to market?  

Todd Fanning  09:13  

Well, to me, I mean, there’s a couple of ways you can go about that, if it’s, if it’s simply a cushion that you’re looking to build up, then the metrics are a little bit different. But if it’s an acquisition, for instance, like if you’re merging with a credit union, you’re going to combine the capital of the two entities. If you’re buying a bank, you’re on your own. So you’re going to immediately have a lower capital ratio, because you’re adding a lot of assets to your balance sheet. So the way you  think about that is in terms of your leverage, you know, if you’re adding so much in capital, and you want to maintain, say, a 9% capital ratio, then you just lever up to that number. And that tells you how much you can add in terms of total assets generally speaking. And if you add below that line, then you’re going to come out of the acquisition, and the additional capital with a better capital ratio.  

Doug English  09:59  

Mike, any additional comments on that?   

Michael Macchiarola  10:01  

Well, this is really the hottest topic if you would, today, around sub debt. Because we’re in an environment, Doug, which most of your audience recognizes by now. And if, if they haven’t, they need to the cost of member acquisition is as high as any of us can remember, the cost of member retention is as high as any of us can remember. And so what that means is, folks that want to see growth, for one reason or another, are going to have to look to non-traditional or non-organic sources for that growth. Enter the acquisition, or the merger. The merger in many cases is easier, because it’s less capital intensive, you’ll suffer less dilution, as Todd alluded to it average of the capital level, when you get a net worth, the bank deal is going to require you to pay the bank shareholders typically, at a multiple, let’s call it one and a half to two times, depending on where in the country, you’re trying to buy that bank. And if it’s in Florida, it may be north of two, God bless Florida. But it’s very capital intensive, your capital ratio, your net worth ratio is going to suffer. And that’s why today we’re seeing sub debt used to push that capital ratio back up either prior to a merger or an acquisition or contemporaneous with or right after acquisition. That’s what you’ve seen. And as Todd said, you know, he’s in an interesting vantage point, because GreenState, having done three separate transactions, has kind of played the general growth role, has also played wasn’t expressly for an acquisition, but it was their second raise was around a time that they were absorbing several acquisitions. And then he’s done a third raise since, also for a little bit different spin.  

Doug English  12:03  

It is. And that’s kind of one of the things that caused us to want to do that today’s podcast. So let’s go into those. Let’s go back to the beginning. Let’s go back to the what looks like the cheap capital in October of 2020.  So take me back there. How did you decide to do this? What were you after? Tell me about the process of going through your first raise?  

Todd Fanning  12:29  

Well, it wasn’t the first attempt, as I mentioned, because we had been trying to get approval for several years and were unsuccessful. In fact, I was told by one former chairman of the NCUA that you won’t get that secondary capital Todd until you don’t need it anymore. And he was almost right, because our ratio had been so thin up to that point. And when we finally asked for it, we were closer to 9% total capital, but honestly, looking back on that the mechanism wasn’t correct. We needed to partner with somebody that had been through it and knew exactly how to submit that plan. And that’s where Mike walked in. Funny thing is, a side story. Mike came here to the credit union, selling deposits, basically. And he just said something that triggered that they had some experience with secondary capital and my alarms went off, that that was something we were trying to do, and I just didn’t have the right partner to do it with. So that got us started. And it was more or less, what I would call a proof of concept, let’s just submit a plan, pick a dollar amount that we think can get approved. And then we’re open to do future offerings. And so that’s kind of where we settled on 20 million, we debated on the amount. But as Mike said earlier, that was a big amount at the time to do that. And so we successfully got that done. And that opened the door then to the future offerings, it was always a way to get our foot in the door. And then think about using it for future purposes. So, the next one, the 40 million came shortly thereafter. And that was around the fact that we had bought one set of bank branches an acquisition, and we’re getting ready to do another acquisition. And as Mike alluded to, that dilutes your capital. And so it was a way to keep our capital level higher at the time to allow us to be able to do those two. And then we also did a third acquisition shortly after.  

Doug English  14:30  

Did what you thought was going to happen, happen as far as the way those issuance, you know, those first two issuances went, the amount of cost involved in the issuance? I’m pretending that you’re talking to someone that has not done this yet, and is trying to set expectations around timeline, the experts you need in your corner around costs? What would you say to yourself back then?   

Todd Fanning  14:57  

Well, I mean, at the time, the first one was 3.75%, the second one was 4.5%. And that sounds like a bargain by today’s standards. But you gotta remember when we did those, the interest rate environment was a whole lot different at the time. So that was not what I would call cheap cost at the time. But because we added through those three acquisitions, acquisitions, roughly about a billion dollars in assets, it was pretty cheap capital, then because you can turn a pretty good margin on a billion dollars more than enough to compensate for the cost of not only the four and a half, but the 3.75 too. But as far as the offering itself, I mean, Mike and his group at Olden Lane, just were phenomenal in terms of getting investors in front of us and, and marketing the whole deal, let alone putting all the, you know, the information together to get regulatory approval. It really is a turnkey approach. Now, Mike would say “Yeah, well, we needed a lot of help on this side to get the information.” But that’s really easy. Just giving it to him, his team put it all together and took it from there.   

Michael Macchiarola  16:00  

The first hurdle we had to get over is that Todd’s a big St. Louis Cardinal fan, and I’m a Mets fan. So that was that that was the first thing we had to work through.  

Todd Fanning  16:09  

Once we set those things aside, we were good.  

Michael Macchiarola  16:12  

And I’m still upset that they dumped Vince Coleman on us. But either way, I mean, that was really important. The other thing that was interesting, as Todd said, the 20 million at the time was a massive amount. It put GreenState when it was done at the top of the outstanding table for sub debt or secondary capital at the time, only behind, they were third only behind Self Help and Jope and Self Help and Hope are very different cases, they get access to foundation capital and at below market rates. So they’re just a little bit different animal than the pure run of the mill secondary capital offering at the time. So Todd had the most outstanding sub debt or secondary capital when we completed that offering. And I still remember when we went to market, I said to Todd, I said this is this is a lot of capital and no one’s brought this. I don’t know how it’s going to go. And I kind of said to him, I’ll check back with you in a few days. And honestly, I think I had it sold in three calls. Now. It’s not because I was so good. It’s really because GreenState is a very well-respected institution. Their balance sheet and their businesses is special. But number two is they do a very, very great job in the community. They are very well known for it. And that’s a testament to Todd and his team. When we went with that offering, I really honestly had my arm bitten off, and I was almost embarrassed to call them as quickly as we were able to fill it.  

Todd Fanning  17:39  

And that happened the second time too pretty much I think we were oversubscribed, maybe on all three of them. But at least the first two for sure. Yeah.  

Michael Macchiarola  17:46  

Yeah. Yeah.  

Doug English  17:48  

So the third one is the one that really got my attention, because a completely different type of an offering. So you whoever wants to go first, talk us through that. Because obviously, now we’re talking February of 2023, the world has really started to change ininterest rates, and you get really creative. So let’s go a little bit more detail on this next offering.  

Michael Macchiarola  18:11  

Todd, before we get to the actual structure, there’s one thing that I should highlight here, Doug, that is something that Todd noticed quickly, and a lot of our clients figure out. You really honestly, the way the reg works, it behooves you to kind of have what I call an evergreening plan, it really behooves you to have an approval in your hand before you may necessarily need to draw on it. Now there’s two things that are working here. Number one is the regulation permits you to ask for your capital to apply to your regulator, which in every case is going to be the regional head of your region to seek an approval. When you do that, and you put your regulatory application and you wait 60 days for a thumbs up or a thumbs down. And Todd’s case, he also has the state regulator. But once you get the thumbs up and you’re approved, it doesn’t create any obligation on your part, you do not have to go to market. So there’s really two separate decisions. The first is do I seek an approval to have the regulator say I can raise 20 million 30 million $40 million. That is a separate decision than going to the market at today’s interest rate and seeking that $30 million. And Todd was smart enough, and his team, to realize like, it’s really making sense to seek out that approval when you’re ready, or you think you’re going to be ready down the line to have it in your hand when you want to access the market. Sorry to cut you off.  

Todd Fanning  19:39  

And along those lines, the thought was okay, we’ve already knocked two out of the park, let’s go for the big home run, and go for 100 million, we actually had some conversation about even going higher than that. Because Mike and his team were pretty well set that we could probably do more if we wanted to. And it was sort of a preemptive hit to the market, because we knew at that time, interest rates, were probably going to go up. So it would be good to get approval. And if we were going to do this, let’s try to get a lower rate, although at the time 7.75 seemed high, it doesn’t seem high now by today’s standards. So that was kind of the backdrop to do this offering. And just in a normal course of conversation, Mike and Dan Prezio made the comment that we could probably broadcast this to a bigger audience. If we had this social wrapper idea, you know, if we could come up with some idea that would fit into that framework. And I stopped him and said, “Wait a minute, we already got one.” Shortly before that, we had introduced our billion dollar initiative. And that’s to fund it started out as a $500 million homeownership to African American population to bridge the homeownership gap because in, in the state of Iowa, it’s one of the largest in the country. But we doubled it and went to another 500 million to Hispanic population, because they’re equally underserved. And so, the idea was, we’re already doing this program of minority homeownership. And Dan and Mike thought, that’s perfect. So it’s not like we decided to come up with a program to be able to do the secondary capital. We already had the social part of that in place to go with the secondary capital offering. So it really worked out well. And just to give you a little bit of insight on that that’s not even been two years, since we committed to doing a billion dollars. Today, we’ve already funded 578 million. We thought that was gonna be a 10-year goal and two years into it. We’re already over halfway. So, it has been wonderful for the credit union industry.  

Doug English  21:54  

It is and just an incredible idea. So, let me step back a second because, frankly, I don’t understand why is it less expensive? Why is it that Mike can sell a a social bond at a less expensive cost of capital than a normal bond? Why is that?  

Michael Macchiarola  22:14  

It really goes to who’s been buying subordinated debt from credit unions historically. So the size is increased, as the size is increased of both the market and the number of issuers and the size of the average deal. It’s become a more mature market, and it’s attracted additional eyes. But here to for, the large majority of these offerings have been purchased by other financial institutions or other financial depositories. Really, it’s other credit unions have been the biggest buyer. And then community banks. And some deals of certain size, typically those that get rated and that’s typically the line of demarcation has been around $50 million. I think there have been five deals that have been rated. A rated deal essentially allows you to take it to insurers and to other asset managers. And so that’s an attempt to broaden the market reach. And that’s happened and several have done that. What’s unique about the social bond wrapper, is we had in Todd’s case a reason to do it, he had an existing program, as he said, but by wrapping it in a social bond, and essentially, that means you go out to S&P and they read it and they go through your methodology. And you have to work on a methodology and you have to work on a reporting mechanism and regime that you then post on your website, there’s a whole host of things you have to do. And there’s costs, and there’s structuring. But by doing that, we were able to offer Todd’s GreenState’s offering to a broader audience, we not only picked up those, because we were rated as well, we had a typical financial services rating. So we were able to offer it to those investment managers and those insurers, but now we were able to offer it the pockets of ESG or socially conscious investors. And it really worked in Todd’s case by broadening that distribution, and some of it is timing, and some of it is luck. And most of it is just the ingenuity of Dan Prezioso and Mike Macchiarola. But we were able to broaden that distribution, and pick up additional investors that were ESG or socially conscious investors. By doing that, we oversubscribed the deal, we were able to offer it at a price point that was probably a quarter in from where we would have offered it if we were just going regular way without that wrapper. And Todd gets to put a feather in his cap. Because when it comes to deals of size, and I’ll say you know 30 million or above GreenState is the first deal of that size in the market where the majority of the investors are not financial depositories. And that is a big deal. I believe it was up to 51 different investors in Todd’s offering. And the majority were not financial institutions or financial depositories.  

Doug English  25:21  

The takeaway in the cost of capital is about a 25-basis points savings on the issuance over the over the term is what you think about what the savings was, because having more participants more folks eager to take your issue drove down the interest rate a little bit. Really, really, really creative. The combination of, of serving the need for the credit union and lowering the cost of capital and delivering the social good, is a wonderful intersection that’s very difficult to achieve.  

Todd Fanning  25:59  

Yeah, the funny thing is a lot of those investors wanted to know, how are you going to keep track of, you know, these funds being deployed specifically for that purpose? And I said, Oh, don’t worry, we will have spent that money and in in no time and again today, we’re 578 million. So we clearly went well past the 100 million. And we were going to do the initiative anyway.  

Doug English  26:20  

So along these lines. Do you know of other stories of other credit unions doing similar things? Are you the only one in the marketplace?  

Michael Macchiarola  26:28  

GreenState is the only one. It’s not surprising in a certain sense because since GreenState’s offering there have only been two other deals of that size. Global brought a deal right after GreenState. Global was similar size. That’s the old Alaska USA. That deal was interesting because that deal went off over the weekend when Silicon Valley Bank blew up. So again, made for an interesting weekend. But that deal successfully went off.  There’s been a subsequent deal of similar size out in Idaho that went off. Different dealer. That deal rated yes, no social bond. No, the problem or the issue with a social bond is number one, you have to stand up a program that makes sense for that size, you have to segregate the net proceeds for that use. Todd and his and his team had that existing use, which made it interesting. The other thing that’s happened subsequent to those offerings is that the ESG, markets changed quite a bit. It comes with a little bit of baggage now, right? It’s under a little bit of attack that market has come in in terms of the number of offerings, and it makes sense, right, as the market has sort of absorbed some friction here, those deals are going to be under a little more scrutiny. It’s interesting, because when you price the deal on an ESG hurdle, credit union subordinated debt will do very well. Because it will be a high yielder in that world. Because what happens is this deal is driven by the price of credit union subordinated that it’s not driven by its ESG bonafides. Right deals that they are used to seeing in that world are really driven by the ESG side, and the hurdle is typically lower. There have been two bank deals that predated the GreenState offering. And that’s why, that was really our inspiration. Those were not for social reasons, they were more for sustainable or climate change reasons they were to support solar offerings and the like. So this deal is unique, because it’s the only social bond issued by a credit union as part of subordinated debt. And it’s because its purpose is the only social purpose outside of the sustainability and climate change regime. So it is a very unique deal, and it is a real feather in the cap of GreenState to have gotten this off the way they did.  

Doug English  28:48  

And over this period of time, 2020, interest rates are super low, and they start to maybe come up a little bit in 21. And then in 23, of course, 22 and 23 all heck breaks loose with interest rates. And, you know, the whole credit union industry GreenState included, goes through dramatic stress tests, right stress tests of our balance sheets, and retained earnings. How did sub debt play into that? How did any of these issuants or how you were dealing with them thinking about them? How was that part of that any of that equation wasn’t at all?  

Todd Fanning  29:29  

Well, there’s certain parameters you have to meet when you actually do the filing to show that you have stress tests, or whether it’s interest rates up or down or whatever version of that you choose. And we passed those that’s all part of the application process.  

Michael Macchiarola  29:45  

You Yeah, we do a series typically with our credit unions, and it’s, it’ll be unique to  each institution and its circumstance. But typically, we’ll stress it a dozen or 15 times. Interest rate stresses, margin compression, deluge of deposits, dearth of deposits, lots of different things that we will test. The measure for the NCUA in terms of approving one of these plans is essentially, can they make or support repayment in any reasonable situation? And that’s why you go through the stresses. And so the project is really to create your best estimate of a 10-year baseline pro forma. What is this credit union going to do over the next 10 years that really should be keying off of what is it done historically, if you move, you know, in any significant variance from that, you really have to explain why. And if we move in any direction, typically we’ll move to be conservative and all of those growth rates because number one, we want to protect the institution and be sure for them that they can make that repayment. But number two, the exercise is to convince the NCUA so we typically err on the side of conservatism when you got that baseline then you stress it. So, you prove out that essentially you’re not going to violate any, any of the ability to repay somebody like a GreenState in terms of their size relative to the size of the offering will typically survive those tests with flying colors. It’s important even for smaller institutions to understand that there’s a natural limit on how much sub debt you should seek, we typically draw that line around 2% of assets. It will move in a whole number of reasons in one way or another. But typically, a rule of thumb is that a 2% level of assets is should be supported by a reasonably healthy institution without too much trouble.  

Doug English  31:40  

Were the loan losses that the GreenState and others experienced in recent quarters? Were they inside of the test parameters for the for the issuance? Is that is that less than what they tested for? Is that a three sigma kind of event or is that just so extreme? It isn’t in those bands?  

Todd Fanning  32:01  

Well, I mean, if you think back to 2020, through 2023, we weren’t experiencing virtually any loan losses compared to what we’ve seen here recently. So even if they would have tested to the point of where we’re at today, that probably would have been unfathomable at the time, just based on our really low loan loss history. And I think we’re still right around our peer groups, and that, but it’s certainly higher than it would have been a few years ago.  

Doug English  32:29  

Yeah, it’s been an incredibly challenging time for for credit unions. And so I wonder, I think that Mike, you had said that sub debt issuance has slowed down a lot. Is it the industry getting too conservative and this environment? Is that the need for the capital not there? What’s changed? And, and how do you see GreenState and others going forward with additional issuances?  

Michael Macchiarola  32:53  

So I think there’s been a change in terms of the visibility down the road for most credit unions. Most of the institutions that we look at number one, they’re reeling from having looked hard internally over the last quality 10 months with the interest rate move. And you see that, it’s interesting, I was explaining to someone how that’s pronounced, actually, in the merger and acquisition activity, there’s a significant decline in 2023. So there’s a trend line that begins in 2019, which grows the mergers that are happening in credit unions, it also grows the bank acquisitions. 2023 is actually a decrease or a significant move back in, I believe 24 is going to blow away that trendline. And so 23 will be your anomaly. And the reason for the anomaly is because everyone focused internally, there was no appetite to do anything outside your four walls. So the same thing applies really to sub debt, because there’s not yet visibility down the road. If I said to you, are you going to need some debt for risk absorbing purposes are you going to need it because growth comes back and is ripping? No one really knows, right. But again, I would say that people, and the smart people are doing this, get your approval, stack your approval and hold on. Because when rates move to a place you like them, or the visibility improves, and you see growth, that’s when you’re going to want to reach for that capital. And rather than making it a six-month process of regulatory submission, regulatory approval, and then go to market, you can shorten that playing field significantly by putting the approval in your pocket. And waiting until the opportune time, whether it’s because the target presented itself on a bank side, or a credit union merger is in the offing, and you want to just bolster capital for growth, or you see a new market that you want to build a branch into or spend on capex, you know, those things come and you can’t time them, you can’t always figure out when they come. So you want to have the optimal set of tools available. And I think the smart people are beginning to stack those plans up, we’ve got several that are on the shelf. There’s no reason not to in terms of the way the reg works, and the way honestly, somebody like us will price those deals. I mean, institution like Olden Lane, we get paid when you when you raise the money, we don’t get paid significant amount at all, to do the lion’s share of the regulatory work. So there are plenty of folks out there that have that approval, where Olden Lane really hasn’t been paid at all, and that’s fine. That’s our business model. It’s priced in.   

Todd Fanning  35:22  

And Doug, I would tell you, on top of what Mike just said, while people think about secondary capital in an aggressive manner, I can tell you in 2023 with the earnings challenges that we’ve had, I mean, we would be well capitalized without that 160 million in secondary capital, but it sure makes our ratios look a lot better in a time of challenging earnings when we got that 160 million already on our books.  

Doug English  35:48  

Well, a great, great conversation guys, I have really enjoyed it, I’ve learned a lot. So as we wrap up here, I just kind of open the floor to any sort of final thoughts you want to say, Todd to your peers as far as what they might think about or how to start evaluating this area of the marketplace. I do hear from some credit union leaders that they’re kind of against the idea of secondary capital, because it makes us as an industry look too much like the banking industry. Any comments that either of you want to make as we wrap up?  

Todd Fanning  36:24  

Well, at the end of the day, when people look at our financials, nobody says we look like a bank. So I would say you got to do what’s best for your own institution. And it has certainly fit well into integrating States plans over the last several years. The two things I would tell you, one, if anybody wants to reach out to me, they can but you should definitely contact Mike and his group at Olden Lane, I just can’t say enough good things about him and Dan, and how they handled the whole thing, let alone the putting the plan together, but the execution of it. And secondly, it has a side benefit in that we just completed our first auto securitization. And it was amazing to me how many people reference our subdebt. Either they knew about us through that, or we use the rate, same rating agency through that we had some investors that bought in our secondary capital that bought auto loans. So the more that you can get your name out there in that in that environment, the better off you’re going to be. So I would highly encourage people to look at, at least look into it. And not just turn away from it because of the perceived negatives.   

Michael Macchiarola  37:32  

You know, thank you, Todd, for those kind words, that’s, that’s very nice. I would say, we’re not ever going to push somebody and I know all the other guys in this market as well. And they’re all the same way, we’re not going to push somebody into something that doesn’t make sense. Subordinated debt is one of those things that when you look at it, and we will never even entertain signing an engagement agreement with anybody until we’ve looked at it in depth with them. So, we will model, we’re constantly modeling for folks before we have an engagement and plenty of them aren’t ready or it’s not the right time or the numbers don’t work in terms of where their business is. This is not something to take lightly, this is a significant amount of work. And it fits only in certain circumstances. But it is your job, honestly, at your credit union to deliver for your members. And so. if you think you’re in a situation where it may work, reach out, reach out to us and reach out to others. I mean, the adults that do this for a living can be very, very helpful. And the process of going through looking at it can be very illuminating in terms of why it does or doesn’t fit. We ultimately have to sell this and we ultimately have to be in this business for a long time. So I don’t want to ever want to bring an offering that doesn’t make sense. Number one, the regulator will laugh at us and, and you. And number two, I’d never be able to sell it anyway. Right? So this is, again, this is a significant undertaking, it’s a lot of work. But for certain institutions, in certain situations, it makes a ton of sense. And we’re happy to help in any way that we can on this subject or anything. I’m just gonna say like, honestly, I love this business, Doug to circle back to where we started. Because the people are great. And what we do at the end of the day means somebody got a loan, or somebody got a better rate on a deposit or a cheaper rate on a loan. And that is so rewarding to go home every night and say, you know, I see that name of that credit union on that basketball court during the during the playoffs over here and I’ve done business with them or I know that they’ve got secondary capital, and it meant that many loans are that many dollars to that many people. And that’s a really cool thing to be able to do. And we’re happy that we get to do that every day here at Olden Lane.  

Doug English  39:43  

Thank you, Todd Fanning from GreenState for joining us today. Thank you, Mike Macchiarola from Olden Lane, for your work, both of you for your work serving the credit union movement for delivering value to the membership, and I wish you both very well a great rest of your day. Thanks, guys.  

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