Secondary Capital Loans - National Federation of Community Development Credit Unions

Frequently Asked Questions

What is Secondary Capital?
Secondary Capital is a “subordinated” loan. This means that, in the event of liquidation, all other debt owed by a credit union must be repaid before the secondary capital loan is repaid. Although it is a loan, it counts as net worth for regulatory purposes, because it is available to cover any insolvency of the credit union.

What are the advantages of Secondary Capital Loans compared to Deposits?
According to NCUA Rules and Regulations [Section 702.2(f)], a low-income designated credit union may count Secondary Capital loans as part of Net Worth when calculating the Net Worth-to-Total Assets ratio for compliance with Prompt Corrective Action (PCA). A deposit, on the other hand, will increase assets and not increase net worth, therefore lowering the Net Worth to Total Assets ratio.

Who is eligible to borrow Secondary Capital Loans?
Only credit unions designated as low-income by the National Credit Union Administration (NCUA) may borrow secondary capital. The NCUA also requires that a credit union file a plan on how it will use the Secondary Capital funds. Who is eligible to lend Secondary Capital? Organizations, institutions, and corporations, whether non-profit or for-profit, can make these loans to credit unions. Individuals are not permitted to make Secondary Capital Loans to credit unions.

Does the Federation have any specific requirements of Secondary Capital Loan applicants?
In order to be eligible for a Secondary Capital loan from the Federation, a credit union must:

be a policy member in good standing of the Federation for at least six months
have at least two years of lending experience.

What are the normal terms for secondary capital loans?
Presently, we make secondary capital loans on these terms:

Amount: up to $500,000
Rate: 5% annually, payable quarterly
Term (maturity): 5 - 7 years

How do I account for a Secondary Capital loan?
When you receive a secondary capital loan for more than five years – say, of $250,000 – all of it counts as capital, until the time to maturity decreases to five years. So, when the money is received by the credit union, the accounting entries should be: Debit – Cash Credit - Uninsured Secondary Capital.

When there are only five years to maturity, you take 20% of the original entry – in this case, $50,000 – and reverse it out. The entries at that time are: Debit - Uninsured Secondary Capital Credit - Subordinated Debt

So, at this point in time, only $200,000 counts as Net Worth, while the other $50,000 counts simply as a subordinated loan. Each year, you repeat these entries. So when you have less than one year to maturity, all $250,000 counts as a subordinated loan, and none counts as secondary capital any longer.

Why is it that the amount I can count as capital keeps decreasing and can’t be counted as Net Worth?
This structure was the only one NCUA would approve. The intent of NCUA is to make sure that you keep building up your primary capital during the period of the secondary capital loan, so you won’t depend on secondary capital.

Are there any other advantages to Secondary Capital?
A bank that makes a secondary capital loan to your credit union may be able to get a much higher dollar amount of credit under the Community Reinvestment Act (CRA). (Please see our reference information on this topic.)

What is required in order to apply for a Secondary Capital Loan?
Complete and send in an application form and include:

Amount and proposed use of the funds
Last two annual financial statements
Three- to five-year business plan
Description of the credit union’s history and past performance
Expected impact of the investment
Plans for growth, for introduction of new products, and for attraction of new members
Three to five year financial projections
Copies of recent Letters of Understanding and Agreement and Documents of Resolution
Copy of most recent Lending Policies
Copy of Delinquency and Collections Policies and Procedures.

That sounds like a lot of work. Can I get help completing the application?
The Federation’s Technical Assistance Department is available to advise you at no cost.

If approved, what documentation does the Credit Union and the Federation sign?
The documentation we require is a loan agreement (which is signed by the credit union and the Federation), and a promissory note (which the credit union signs). Also, the NCUA requires that the lender of a Secondary Capital Loan sign a “Disclosure and Acknowledgement” form that specifies the conditions of the loan. This form is kept on file by the Credit Union and made available to the NCUA examiners.

What kind of reporting is required?
All credit unions that receive Secondary Capital from the Federation must complete semi-annual narrative reports.

Ready to Apply?

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