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Secondary Capital / Subordinated Debt With Expert Dan Prezioso

In this episode of With Flying Colors, Mark Treichel interviews Dan Prezioso, a Partner at Olden Lane. Olden Lane provides financial services to credit unions throughout the United States including advising and assisting in the raising of subordinated debt (previously known as secondary capital).

We discuss the topics below (and many more):

● Current Trends In Sub Debt

● Purposes of Sub Debt

● NCUA Letter to Credit Unions – Evaluating Credit Union Plans

● Low Income Designated Credit Unions


● Risk-Based Capital

With respect to an Issuing Credit Union that is a complex credit union (500M) and not a LICU, the aggregate outstanding principal amount of Subordinated Debt is included in the credit union's RBC Ratio. If a credit union is both a LICU and complex, the aggregate outstanding principal amount of Subordinated Debt, including Grandfathered Secondary Capital, will count towards that credit union’s net worth ratio and RBC Ratio.


Listen to the podcast here

Secondary Capital / Subordinated Debt With Expert Dan Prezioso

I'm excited to be joined by Dan Prezioso, a Partner at Olden Lane. Dan, how are you doing?

I’m doing well, Mark. I'm a big fan of the show and happy to contribute to it. It's a great resource for learning about credit unions and what's going on in the industry. I'm consulting regularly. I appreciate you having me on.

I appreciate you being willing to chat with my readers about what Olden Lane is doing. I went to Olden Lane's website to make sure I wasn't missing anything. My understanding of what you offer and my interactions with Olden Lane have mostly been on secondary capital. Old habits die hard. I have a hard time stopping calling it secondary capital. It's subordinated debt with the changes of the NCUA regulations. You help credit unions quite a bit in that. I believe you're the market leader as far as issuing either secondary capital or sub-debt and credit unions. I thought it'd be great to talk about what you see happening as it relates to subordinated debt and credit use.

It's a very dynamic and emerging market. To give you an idea of the type of growth that we've experienced over the last few years, at the end of 2017, the total outstanding subordinated debt issued by credit unions was a little over $220 million. As of the end of the 1st quarter, it was over $1.1 billion. We've seen over $900 million in net new issuance over that period. The number of credit unions that are in the market versus back then is about the same by 85, 86 issuers. What's driven that growth is the type of credit union that's accessing the market. What we're seeing is much larger credit unions participating.

The average participant is close to $1 billion in assets, whereas back in 2017, it was more like $300 million. The average amount of issuance has increased 4 or 5-fold. That’s what's driven the growth over the period but it's been very dynamic. If you look at the growth rate and I can give you a chart that you can post for your readers but it's been vertical over the last several quarters. It's an exciting time to be a part of the market. It's an emerging asset class. We're seeing different types of investors participate and seeing more issuance from some top-performing credit unions.

It's fun work to be doing. We started back at the beginning of 2017 when it was more missionary work. It was a concept that was rather new. Historically, sub-debt was something that was regarded as maybe a Band-Aid or a lifeline that credit unions that were struggling might turn to. What's changed is that it's recognized as a tool for growth and for well-performing thriving credit unions to use to continue to potentially grow for a short period at a rate that's a little faster than their ability to retain earnings. We've seen that growth due to conditions that inflated savings rates. A lot of credit unions have found it a good tool to navigate recent conditions as well.

Submitting a package to NCUA takes serious planning and analytical exercise and you have to have a strong purpose for the capital.

Those numbers you’ve quoted, the Treasury ECIP Program, is that inclusive or exclusive?

That's exclusive. Thanks for bringing that up. I often refer to the market exclusive of ECIP and fortunately, to keep it a little less confusing, the ECIP dollars have landed. They're not in the figures that I'm quoting but they will be on the next call report. We should probably pause and explain what ECIP is. What you're referring to is a government program. The Department of Treasury has very invested about $2 billion in 85 credit unions that were CDFI or minority designated institutions, CDFIs Community Development Financial Institution. Those credit unions are going to be very well capitalized. They got a great opportunity with that program. The investments are subordinated debt that's been issued to the Department of Treasury.

The terms are fantastic for those institutions. Often the term is 30 years. It was between 15 and 30 at the election of the institution. All of our clients selected 30. I'd imagine practically all of the participants did. In generational capital, the interest rate is 0% for the first 2 years. For the remainder of the term, it is up to 2%. If certain benchmarks are achieved with respect to growth in lending to minority borrowers, other target populations and low to moderate income borrowers, that interest rate can be reduced considerably even down to 0.5%. It’s a fantastic opportunity for those credit unions. We have some clients that participated.

It's generational. Within that generation, it may be a one-time opportunity. It's by far the most robust offering in my years in credit unions that I saw treasury offer up. Before anybody reading gets too excited, with this program, the ship has sailed. It's not something that somebody could apply now but it's a great opportunity for those credit unions. There are probably some who were eligible and maybe wish that they had particularly where rates have gone in the world and the economy that we're having.

One other thing maybe you can comment too is understanding that perhaps it was good to get all these packages into NCUA and while Treasury approved it, NCUA also, as insurer or regulator or both had to approve the issuance of this opportunity, which goes to what you were saying about the volume taking off. A subordinated debt is becoming more of a tool in the toolbox that more credit unions are going to use. Many took advantage of it under ECIP so some of them hadn't done a subordinated debt previously. NCUA is getting more used to seeing big packages, which is a good thing. It’s paving the road where the future might go as far as the volume in this industry. Any thoughts on that?

That's right. It's going to drive the volumes of outstanding subordinated debt, increase it, more than double it from over $1 billion to going to be well over $3 billion next call report. It's going to change from the competitive dynamics in the marketplace because you're going to have credit unions that are very well capitalized by virtue of this public capital. We've seen peers in those markets look at their capital ratios, especially as it relates to merger and acquisition strategies. Have to think about how they're capitalized relative to peers that are out there competing for loans and inorganic growth opportunities through combinations with other firms. It's also the case that looking at this market if we want to analyze it accurately, we have to bifurcate it.

WFC 32 | Subordinated Debt
Subordinated Debt: Interest rates generally have changed across the boards and spreads are widening out due to the liquidity at depository institutions so you have to take into account the incremental cost of the capital versus the benefit of being able to operate with a stronger capital position.

We have to understand that public capital is very different than the private capital market. The regulatory process was very different as you and I discussed quite a bit. Those applicants and participants in the government program tended to be able to be approved for much larger amounts than we typically see in the private capital market. It exercised the NCUA in approving larger amounts and maybe normalizing larger amounts to some extent but after all, it was generational capital and very cheap.

It was essentially a federal government stimulus program. There wasn't as much impetus to scrutinize those packages to a large degree. Although we did work with some clients that needed some help with the process because they were running into some pitfalls but we were able to work through it with them. I don't know anyone that was not able to get through the process successfully. Some of them had maybe a little more of a frustrating experience than others but in general, has a very high rate of success in the public program.

The private market is still a little different. I do not want to take it lightly. It's an exercise that’s gotten a lot better. One of the things that have occurred during that growth period I described since 2017 where we've had such explosive growth is we've had a very dynamic regulatory period as well. The NCUA has honed in on its policies with respect to this concept. First, I believe in 2019, they issued a twenty-page memorandum outlining the standards by which they were going to review applications to issue subordinated debt.

In 2020, they proposed a new rule, which was adopted in 2021 and is going into effect in 2022. It's been a period of very dynamic regulatory changes as well. The good thing is with those standards being codified, we've seen the process get more reliable across the industry. For our clients, we've had a tremendous amount of success throughout the process. When we started 2017 looking at this market, it was the case that over half of the plans were being denied.

As of 2021, if we look at the data, 2/3 of the plans were being approved so better. I still think a denial rate of a full 1/3 is pretty large. I'd like to see that improve. Fortunately, among our clientele, it's a lot higher but that goes to show the amount of expertise that’s needed to navigate the process well. I like to see across the industry those approval rates continue to climb but we've seen things going in the right direction. That's enabled the growth that we're seeing and drawn more credit unions to be intrigued with supplemental capital as a tool.

You mentioned the letter to the credit union. That was 1901. The subject of the letter to the credit union is capital planning. As you point out, it wasn't until that point in time that NCUA said, “When you put a package in, here's what you need to address.” You said twenty pages. It's long for a typical letter to credit unions. It does provide a lot of guidance. Some of those credit unions that get denied might not be looking closely at that letter to credit unions.

Credit unions in the industry by large are not as well capitalized as they were before the pandemic.

Someone who thinks that this 20-page letter can be responded to with a 5 or 10-page response to NCUA, that type of response probably gets rejected pretty quickly. I've seen some of your packages and I know that when Olden Lane takes a look at that letter and what the credit union needs to submit, the credit union takes it fully into consideration because it's their package but any thoughts relative to that process of submitting a package to NCUA?

It's a serious planning and analytical exercise. You have to have a purpose for the capital. We should talk about the cost of the capital in the market. Generally, the cost for issuing subordinated debt and most issuers issuing 10-year debt is between 5% and 6%. In these conditions, we're seeing the cost of the capital move to the higher end of that range.

That's been dynamic as well and it's very sensitive to the liquidity at other depository institutions who are the primary investors in this market. At the end of 2021, say November or December, issuers were able to print at coupons interest rates of less than 4 in some cases, between 3 75 and 4.25. Now, we're looking at issuance between 5.5% and 6%. Interest rates generally have changed across the boards. Spreads are widening out as well due to the liquidity at depository institutions.

You have to take into account the incremental cost of the capital versus the benefit of being able to operate with a stronger capital position. Conditions are rather uncertain in a lot of respects. A lot of clients see the benefit of additional supplemental capital. We've had a period of pretty pronounced asset growth that was very diluted to capital ratios across the industry. While uncertainties increasing, credit unions in the industry, by and large, is not as well capitalized as they were before the pandemic.

That's generating a lot of interest in supplemental capital to continue to maintain a high level of engagement with members during this period while managing potential volatility and restoring the capital ratio to where it had been historically prior to the conditions that the pandemic brought on. The other use that's becoming quite popular is to support an M&A strategy. We're likely to see through these conditions more and more consolidation. We're certainly seeing that but mergers and acquisitions can be capital intensive, depending on the type of institution that's being acquired or merged with. Subordinated debt can help offset the capital dilution of an acute growth event like an M&A transaction.

On M&As, Mergers and Acquisitions, that could be another credit union or a bank. If someone's reading and they're a low-income credit union and are thinking that they might want to consider a sub-debt for the first time and may want to consider it as it relates to mergers and acquisitions, when is the best time to approach you and an NCUA relative to that? Is it before they have the merger partner or after they've identified the merger partner? What would your thoughts be on that?

Subordinated Debt: Mergers and acquisitions can be capital intensive, especially depending on the type of institution that's being acquired or merged with. And subordinated debt can really help offset the capital dilution of an acute growth event like an M&A transaction.

I would say before. It's a planning exercise. You don't go to market for the capital. You have to plan and anticipate. Frankly, it's always better to be ahead of it. We can act fast but when it comes to raising capital, it's always better to raise it when you can put it to use but you don't have an immediate need. If you have an immediate need, you don't have as much choice and flexibility. You can't wait out certain market conditions that aren't favorable. You get a take what you get.

There's always an advantage in anything. In something like this, it’s a tool like this and planning. Especially when it comes to M&A because the type of planning and analysis that we do, the capital analysis, a capital management analysis, can help size and scope an M&A strategy. That's been particularly important in the new RBC regime where we're finding that those transactions have always been diluted to the PCA net worth ratio because of the impact of goodwill that results from some of those transactions.

It can be more dilutive and punishing to the RBC ratio. Part of what we do in terms of our sub-debt work is also advising potential acquirers in terms of scoping an M&A strategy and determining what's the most prudent bite-size in terms of acquisition partners or merger partners and how much subordinated debt can be utilized to fill in the gaps.

If they come to you and NCUA, they get a maximum amount, whatever that might be approved. That can then work into the math on what makes sense as far as an acquisition partner, particularly as it relates to that goodwill aspect that can hit the books as well.

Exactly. You always want to check as part of the exercise and the analysis, what are the performance benchmarks as a credit union that you'll want to meet to replace a substantial portion of that subordinated debt with retained earnings over the life of the instrument. When the instrument begins to mature, you're able to replace it with retained earnings and you don't find your capital ratio falling off a cliff. That's part of the exercise as well.

What type of performance do we have to target? Is that performance feasible? Is it something that's supported by the historical performance of the credit union? Is it something that is supported by the current business plans and the opportunities that management recognizes in their current markets or new markets that they plan to grow into?

Don't just go to market for the capital. You have to plan and anticipate.

We're talking about sub-debt and the new rule on risk-based capital. Some of our readers may not be aware of this but a complex credit union is defined by NCUA as a credit union of over 500 million. Those credit unions can use subordinated debt as it relates to their risk-based capital ratio. What are you seeing in trends relative to that being something that credit unions couldn't pursue? Either what have you seen or what do you anticipate might be happening in the market relative to that over the next years?

We've seen some interest from complex credit units that are not low-income but none of it has been acted upon. We did have one client initiate the process as a complex, non-low-income credit union. We were able to work with them to get the low-income designation during the process. We've not worked with any credit unions that weren't low-income to submit applications. The reason being is that there's tension in adding sub-debt to the balance sheet.

You're going to extend your liabilities and grow your balance sheet through the issuance of sub-debt. That growth also counts as capital so it's supportive of the balance sheet in general but if it's not counting towards your PCA net worth, it's dilute of event. You're getting a boost on the RBC ratio but by doing so, in some respects, you’re diluting your net worth ratio.

That tension can make it difficult for a non-low-income complex credit union to pull the trigger on the opportunity, which is unfortunate because if you step back and think about a non-low-income credit union that's complex and a low-income credit union. You equivocate all the variables so it's the same credit union. One has a low-income designation, the other doesn't.

You add sub-debt from the standpoint of the risk on the balance sheet, the exposure of the NCUA insurance fund, it's the same credit union but unfortunately, the PCA net worth is controlled by statute. The board does not have the ability to change that policy and take an act of Congress. We do have this unfortunate position where the policy that the board has articulated can't fully be implemented. It's interesting if examiner discretion can smooth that out but since we haven't seen that and we can't guide clients at this point to expect it, it is a tough decision for non-low-income complex credit unions at this point.

We have interest and we talked to not low-income credit unions about it. We're happy to help them through some of the analysis, which we often do as a courtesy because these projects are such that all parties involved need to understand that it makes sense for the credit union. We do a fair amount of analysis up front as a courtesy. Until Congress can act on that statute, we won't see non-low-income credit unions contributing tremendously to the growth rate. What we are seeing is continued interest in the low-income designation and the availability, exemptive relief that comes with it, including that related to sub-debt and the ability to count the sub-debt towards both capital ratios.

Subordinated Debt: The desire for a low income designation influences business plans, growth plans, field of membership, charter expansions, as well as M&A activity.

The one that you had was able to get that designation and when they start discussing being able to use it for risk-based capital, they understand the value of being low-income and seeing how close to the edge they may be as far as qualifying. There are levers and things that you can pull that will help you get that low-income designation. It sounds like that one client was able to prove that they hit that but it opens their eyes when they realize, “I'd rather count this in my net worth ratio. How do I get this low-income designation?” There are credit unions that then do pursue that.

We're starting to see a desire for a low-income designation, influence business and growth plans, a field of membership, charter expansions, as well as M&A activity. It's a factor. It's a designation that's being sought after more and more. We're seeing it influence how credit unions strategize their future if they don't have the desire to get it.

Picking up those members can help prove in and of itself make them a low-income designated credit union if they look at the data.

We're working with some clients to try to help them identify targets that may be contributory to the low-income membership.

Thinking about the new subordinated debt rule, any other thoughts relative to how that may have changed what credit unions have to do that are worth chatting about?

There have been some pretty significant changes. A lot of the changes have created a little more equivalence with the banks of the debt market, which is positive. Anything that is permissive often also comes with a little more process and burden in terms of the process that credit unions have to follow. That includes the way the offering is conducted. There's more of a documentation requirement that needs to be satisfied with the help and consultation of counsel.

Credit unions have to do more and be more formal with their documentation and prepare something similar to the perspective that the NCUA has articulated in a detailed way in its regulations.

Credit unions have to prepare an offering document. Banks don't tend to do that. These are institutional markets. The primary investors are going to be other depository institutions. For larger credit unions, they'll have a little wider of investors that will include institutional money managers and insurance companies, all institutional markets, the same market that banks tend to tap probably a little more credit union participation while a lot more credit union participation among credit union issued subordinated debt.

Otherwise, it's a very institutional investor pool. Bank issuance tends to be done based on document diligence almost like underwriting through a data room with the only real offering documentation. What the issuer produces are a term sheet and an investor presentation. That's like a slide deck. Credit unions have to be a little more formal with their documentation. Prepare something akin to a prospectus that the NCUA has articulated in a pretty detailed way in its regulations.

That's added some costs to the process and that cost can be anywhere. We're seeing anywhere from $30,000 to $50,000. It’s something to think about as well, something that's created some difficulty for small issuance. Small credit unions have issued a few million dollars, less than $5 million can be tough. We're working with one client on that sort. We found a law firm that can accommodate them but there's a little bit of an exercise there to try to manage an offering of that size in such a way that the costs of the offering themselves don't make the prospect economical. That can be challenging for small credit unions.

I don't believe NCUA intended to have a higher requirement for credit unions than those that are out there in banks. This might've fallen into the unintended consequences where they were trying to create equilibrium and have it treated similarly. I am not also certain that NCUA fully yet understands the ramifications and the cost of that but as more small credit unions try and get it, there are trade associations or whoever communicates that to NCUA. Regulations are pendulum. Maybe at some juncture, they moved the documentation level to 25. Maybe they'll dial that back to 20 at some juncture to create some equilibrium so that those costs might be able to go down for credit unions. We can hope for that.

We had advocated that they’re considering an exemption for smaller credit unions. Others were out there pushing for that part as well in the industry but they didn't take us up on that. It is having an impact on small issuance without question, at least, in our experience. The other thing that is noteworthy and not my favorite aspect of the new rule is that credit unions don't have to decide which side of the market they want to participate in. Either as an investor, purchasing sub-debt issued by the credit unions or as an issuing sub-debt to investors, which are likely to include other credit unions based on the dynamics in this market and the composition of the investor pool.

You can't do both anymore and that's something different than the bank space where banks have been able to participate on both sides of the market. That's something to keep an eye on. It's an important decision. We're seeing a fair amount of credit unions in between on the sidelines like the asset has excess capital. It could be a participant as an investor but are worried that things might change and they would have a difficult time issuing.

Subordinated Debt: Credit unions now have to decide which side of the market they want to participate in. Either as an investor purchasing sub-debt issued by the credit unions or as an issuer issuing sub-debt to investors which are likely to include other credit unions based on the dynamics in this market and the composition of the investor pool.

You could always liquidate the asset but it is the case that these assets and subordinated notes don't have a very liquid trading market. It's an exercise to liquidate them. We've transferred the paper a few times in the past but you have to get a marketing agent like us, go out and find a buyer by appointment. It's not a liquid trading market. That's a factor that is causing some credit unions that would otherwise be participating in the market to not participate in either respect. It is not the most efficient allocation of either liquidity or capital across the industry.

We're seeing liquidity dry up across the market at all institutions, particularly depository institutions. That's going to be a factor that's for the time being driving up the cost of capital. It's not the primary factor. Some pretty large macro conditions are influencing the state of liquidity at depository institutions and other investors. For the time being, we are seeing the cost of the capital being driven up by liquidity considerations. Part of that is credit unions that could be contributing liquidity to the market but are hesitant to because of the new rules.

I could see how that would play a role in that, for sure. It’s like having fewer people qualify for a mortgage loan means fewer people can consider buying my house when I list it. If fewer credit unions can participate, you're impacting the market, which drives the cost up.

It's a supply and demand dynamic. You can think of the market as primarily depository institutions. It’s very sensitive to the liquidity of other depository institutions. For those credit unions that are larger, say one and a half billion or above, there is an opportunity to go reach out to a wider universe of institutional investors that includes institutional money managers and insurance companies. Insurance companies in particular will require some more packaging on their deals.

That is primarily what I'm referring to. It is a credit rating. They have investment guidelines. Often the money managers do as well but in particular, because the investment guidelines are insurance companies also contribute to their regular regulatory capital requirements, there's often a desire and a need to have the paper rated to reach those investors and get good responses from them.

There's a cost to doing that can be over $100,000 a year. That packaging can expand the universe of eligible investors. That's a consideration when we have a client that's been through the application processes and going to market. How much packaging do we want to invest in? What's that going to mean for the offering in terms of the cost of the capital and the speed of execution?

The cost of the capital is driven up by liquidity considerations. And part of that is credit unions that could be contributing liquidity to the market, but are hesitant to, because of the new rules.

It's a lot like a union. There are lots of layers that does secondary capital make sense, what it might cost and how you get a package through NCUA and your state regulator. I can tell that there are things that Olden Lane has seen because of this, considering giving you a call and saying, “We're contemplating it.” Having that dialogue with you, they can start to understand what makes sense and what might not make sense for them.

Another thing that is important to mention is that once you go through the application and get approved, you have the authority to issue the approved amount for up to two years before it expires. You're not obligated to immediately rush out and go to market. A lot of clients do tend to go to market promptly after the approval because that was their business plan and conditions were conducive to that.

If you find either conditions changing such that your business plans are slowing down or conditions changing so the market is not conducive to the issuance or the cost of the capital you're seeking, you can wait for conditions to change. You do have that flexibility for up to two years. The application doesn't necessarily commit you to the issuance. You do have the flexibility to exercise your business judgment and you'll want to use it.

We often tend to encourage clients to think of the application process as optionality. If you see the opportunity to make good use of supplemental capital, give the application process serious consideration but understand that because you get approved, doesn't mean you have to act if things change and things do change. The marketplace is very dynamic in all sorts of respects for conditions to get more conducive. Act on your original plans.

Have you seen anybody wait a year and issue the other half? Cost-wise, is it more expensive to do it in a half and half?

We've seen all flavors in terms of waiting or issuing a part but, to be honest, most clients either wait or issue the full amount, not so typical to issue something partial, although you have the flexibility to do that. We've certainly had clients not act on the authority at all and wait over a year for conditions to materialize especially if it was sub-debt that was in support of M&A strategy. Those transactions can take time to develop. Sometimes negotiations with the target fall through. Sometimes you don't find the right target. There's certainly a fair number of clients that tend to wait. We do encourage clients when you request a certain amount that you're unequivocally going to ask for.

Subordinated Debt: If you find either conditions changing such that your business plans are slowing down or conditions changing. So that the market is not conducive to the issuance or the cost of the capital you're seeking, you can wait for conditions to change. And you have that flexibility for up to a period of two years.

The NCUA does have the discretion to request lesser amounts but they like to see the entire amount analyzed and use the entire amount that's being requested. In your dialogues with the NCUA, you don't want to be equivocal about your request. If you're asking for a certain amount, asks for it and be able to explain how you would utilize the full amount. That's how examiners want credit unions to approach them rather than have a number where there isn't a useful purpose for a portion of it.

That can be awkward to defend, analyze and express. It can generate some skepticism with respect to that residual amount that, in your honest heart, you don't see a useful purpose for. There's a little bit of a dance while you do have the authority for up to two years. You should wait and use your business judgment to make sure the time's right for something like this. It's not something we're advising at this point to go through the process to shelf a large amount of potential supplemental capital because the dialogue and the presentations you have to make can get awkward. If you’re asking for a map, you can't unequivocally ask for, explain and relate to a business purpose.

I couldn't agree with that more. You reminded me of something my dad used to say. My dad was a hunter and he used to say, “When you're hunting, you need to aim high and allow for windage.” You do that in sub-debt. NCUA wants to know that you're asking for what you need. You're going to have to prove how you're going to utilize it, pay for it, why it makes sense incrementally and all that. Don't aim high and allow for windage. Ask for what makes sense and plan to use it at some juncture. Dan, this has been great. If there was a question that I should've asked you, what would that be? Any last thoughts here before we wrap up?

One thing to understand is the fix fundamental. It's probably my fault for not bringing it up sooner but I want to explain how the debt counts towards your capital. Credit unions tend to issue ten-year coordinated debt instruments. That debt, when you issue, counts dollar for dollar towards your capital ratios. If you're low-income, it’s both your PCA net worth and your RBC ratio. If you're not low-income, it only counts to your RBC ratio but on a dollar-for-dollar basis when you issue it.

As you get to within five years of maturity, the debt is discounted for purposes of your regulatory capital, 20% per year. In year 6, if you have $100 of subordinated debt outstanding, you would only count $80 towards your capital ratios and supplemental capital. In the next year, it only counts as $60. During that discounting period, the instruments that our clients are issuing and it's rather standard in the market is to have a call right.

The credit union can prepay the debt during that discounting period. It is a case that credit unions are not going to want to leave that debt outstanding if a substantial portion of it is not counting towards the capital. You would do a capital management exercise in that period after five years and determine how much of the debt is excess capital and not being put to good use. If there's any that you would classify in that regard, probably pay it off. Renew the subordinated debt for the capital treatment when I'm expecting.

If you see the opportunity to make good use of supplemental capital, give the application process serious consideration, but understand that just because you get approved doesn't mean you have to act if things change.

What we often see in the bank market is credit unions apply to issue new debt and extinguished the old to renew the capital treatment. A sub-debt strategy is one that you will review every 5 years even while the debt is a 10-year instrument. We do analyze in the application the debt being held outstanding until maturity. From a practical standpoint, you'll have the ability to prepay.

I should note that those prepayments are subject to the approval of your examiners as well. You can't exercise a call right until your examiners permit it. It's likely to be an exercise that will probably involve some new issuance of subordinated debt, which has an application process as well. It's going to be a capital management exercise that will be done in coordination with your examiners, probably every five-year basis.

I'm glad you brought that up and added that here. This has been great, Dan. If they wanted to talk to you or somebody at Olden Lane, what's the best way for them to reach you?

You can email me at You can reach me on LinkedIn. We're very active on LinkedIn. You can follow our LinkedIn page, as well as our website. We have info at Olden Lane, which you can email and that will reach all the principals of the company. We love to talk to credit unions about these issues and others. We do an awful lot on courtesy to figure out with a client whether or not this even makes sense. It's not a project we want to work on with clients, for whom it doesn't make sense. That often requires working with the client through a little analysis upfront.

We've got a lot of progressive other ideas in the credit union space. We're entirely dedicated to credit unions. All of our products and services are designed specifically for credit unions. We stay on top of the industry and the markets related to credit unions. We're a good group to talk to and we love to chat with credit unions. Anyone interested in these topics, sub-debt, M&A, reach out and we'd be happy to chat.

Maybe we'll do another episode down the road sometime on some of those other services that you offer or may offer down the road. Dan, I want to thank you for your time. It's been informative and the readers are going to enjoy it.

Thank you, Mark. I appreciate you having me. I'd love to come back.

It sounds good. To readers, I want to thank you for your time and reading.

Important Links

About Dan Prezioso

Dan Prezioso is a partner at Olden Lane and is an expert on Subordinated Debt and more.


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