Truliant’s debt offering blazes new trail for credit unions | Credit Union Journal

Truliant Federal Credit Union in Winston-Salem, North Carolina, says its recent $50 million subordinated debt issuance is both the largest by a credit union and the first to receive an investment-grade rating.

The move comes days before a rule from the National Credit Union Administration clearing the way for more credit unions, including some of the industry’s largest institutions, to access subordinated debt is set to take effect on Jan. 1. Under the current rule, only credit unions with a low-income designation have had the authority to issue subordinated debt, which counts as regulatory capital, since 1996.

Banking advocates have fought hard to limit credit unions’ access to subordinated debt, higher-risk notes that are paid out last in the event that the organization issuing them declares bankruptcy, but its usage has increased markedly over the past year. According to the NCUA, credit unions reported holding subordinated debt totaling $568.5 million on their balance sheets through Sept. 30, an increase of 65% from the same date in 2020. Prior to 1996, the only source of capital open to credit unions was retained earnings.

The new rule, approved this month, permits some non-low-income credit unions — including those with more than $500 million of assets — to issue subordinated debt. Truliant has a low-income designation, but many industry giants do not. Under the new rule, heavy hitters like the $151 billion-asset Navy Federal Credit Union in Vienna, Virginia, and the $30 billion-asset Boeing Employees Credit Union in Tukwila, Washington, will receive authority to issue subordinated debt.

Todd Hall, president and CEO of the $3.6 billion-asset Truliant, said the credit union plans to use the added capital, which was issued in the form of 10-year unsecured subordinated notes and will bear interest at a fixed annual rate of 3.625%, to fuel organic loan growth.

“We plan to fill in and expand our footprint with additional locations, reaching new members with services that match their financial needs” and “we also have plans to expand our digital growth with a strong focus on new membership and lending,” Hall said.

In recruiting new members, Truliant plans to focus on South Carolina and push into the upper part of the state.

“We are interested in being aggressive in upstate South Carolina and have already purchased a building in downtown Greenville that will be our hub for the region … and a second branch location in the city with designs to enter a number of surrounding communities in the next several years,” Hall said.

Truliant may also be eyeing acquisitions. In the ratings report it released last month, Kroll Bond Rating Agency indicated Truliant “is open to acquisitions in the $500-$750 million in asset range,” which could possibly include banks or credit unions, according to the report.

Even absent the prospect of merger-and-acquisition activity, Truliant has been a formidable competitor to banks. Through the first nine months of 2021, net income totaled $36.3 million, up nearly 70% from the same period in 2020. Loans of $2.58 billion were up nearly 10% year-over-year.

In addition to working with Kroll Bond Rating Agency, Truliant hired the St. Louis-based investment bank Stifel, Nicolaus to handle the issuance portion of the offering as its placement agent.

Keith Leggett, a retired American Bankers Association economist who continues to follow credit union issues closely, said Truliant’s decision to obtain a rating and retain an investment bank sets it apart from other credit union debt placements.

“It’s big news that credit unions are beginning to get active in tapping the capital markets,” Leggett said. “The historic nexus has been credit union savings financing credit union lending. Now, they’re introducing investor capital.”

Truliant is the first credit union KBRA has rated and likely the first ever to receive a rating from a nationally recognized bond rating agency, according to Brian Ropp, senior director, financial institutions at KBRA.

Peter Gwaltney, president and CEO of the North Carolina Bankers Association, said he anticipated the increase in subordinated debt use by credit unions in the wake of the NCUA’s rule change.

“We saw this coming,” Gwaltney said. “Credit unions are going to do what the regulator allows.”

While Gwaltney said he holds Hall “in the highest respect” and described Truliant as a “fine institution,” he added he strongly objects to cooperatively owned, tax-exempt credit unions tapping into investor capital to finance their growth.

“It should be a triggering event for taxation at the federal level,” Gwaltney said. Credit unions that access the capital markets should be perceived to have raised their hands and said, ‘We should be taxed.’ We believe they’ve elected to be treated differently.”

Congress has not acted on banker complaints about credit unions in recent years, but both Gwaltney and Leggett said they were hopeful the prospect of credit unions hiring investment banks and borrowing from professional investors might attract lawmakers’ attention.

“It’s worth a public policy debate,” Gwaltney said.