1 A Business Case for Community Development FinanceCDFI Roundtable February 27, 2017
2 What it means to be a CDFI?Community Development Key Products & Services Inclusive transaction services Credit Builder Loans Payday Alternatives Financial counseling /1st Time Homebuyers Consumer Impact Financial inclusion of un / underbanked Asset protection Credit building Community Impact Asset Accumulation Increased employment Reduced crime Increased property values Financial Institution
3 What it means to be a CDFI?Community Development Key Products & Services Inclusive transaction services Credit Builder Loans Payday Alternatives Financial counseling /1st Time Homebuyers Consumer Impact Financial inclusion of un / underbanked Asset protection Credit building Community Impact Asset Accumulation Increased employment Reduced crime Increased property values Financial Institution Impact of each CU branch 4% decrease in robberies 3% increase in property values $9.8 Billion added to property values over 8 years
4 What it means to be a CDFI?Community Development Key Products & Services Inclusive transaction services Credit Builder Loans Payday Alternatives Financial counseling /1st Time Homebuyers Consumer Impact Financial inclusion of un / underbanked Asset protection Credit building Community Impact Asset Accumulation Increased employment Reduced crime Increased property values Financial Institution Regulatory compliance Safety & Soundness PCA Capital Delinquencies & Charge-offs ROA Growth & Survival Membership Assets Loans Charter Expansion Mergers, Competition & Sustainability Regulatory Environment
5 What it means to be a CDFI?Community Development Financial Institution Regulatory compliance Safety & Soundness PCA Capital Delinquencies & Charge-offs ROA Growth & Survival Membership Assets Loans Charter Expansion Mergers, Competition & Sustainability Regulatory Environment CDFI Credit Unions consistently record higher ROAs than their peers* CDFI Credit Unions grow faster than peers in Assets, Membership, Shares & Deposits, Net Worth and Total Loans.* Despite focus on toughest markets, “CDFIs show no greater risk of institutional failure than similar ‘mainstream’ peer institutions”** * NCUA call report and 5300 data from 12/31/2012 9/30/2016 ** Fairchild, Jia, “Risk and Efficiency among CDFIs: A Statistical Evaluation using Multiple Methods”
6 CDFI Certified Credit Unions 1996-2016Total Membership (Millions) Total Assets ($ Billions) 286 2016 Members: 8,100,000 Assets: $80 Billion 1996 Members: 81,000 Assets: $161 Million 200 $ 66 123 123 40
7 CDFI Certified Credit UnionsTotal Membership (Millions) Total Assets ($ Billions) 286 Community Development Financial Institutions 200 $ 66 123 123 40
8 CDFI Certified Credit UnionsTotal Membership (Millions) How can we evaluate CDFI credit union commitment, impact and performance? Total Assets ($ Billions) 286 Community Development Financial Institutions 200 $ 66 123 123 40
9 Estimates of CDFI EligibilityTarget Market Response High impact loan products Inclusive transaction & account services Capacity building development services Provision of Community Development Products & Services Target Market Opportunity Branch locations in CDFI Investment Areas Low Income Designation Poverty, Income and demographic data Focus in CDFI Low-Income and Investment Area Target Markets
10 Estimates of CDFI EligibilityHighest Impact Products & Services What they do Provision of Community Development Products & Services Highest Target Market Concentration Where they live Focus in CDFI Low-Income and Investment Area Target Markets
11 Estimates of CDFI EligibilityCDFIs Provision of Community Development Products & Services Focus in CDFI Low-Income and Investment Area Target Markets
12 Estimates of CDFI EligibilityProvision of Community Development Products & Services Credit Unions are highly concentrated in CDFI Target Markets Focus in CDFI Low-Income and Investment Area Target Markets
13 Estimates of CDFI EligibilityCDFI Zone 650 Credit Unions ► 286 Certified CDFIs ► 364 High CDFI Potential Provision of Community Development Products & Services Focus in CDFI Low-Income and Investment Area Target Markets
14 Estimates of CDFI EligibilityProvision of Community Development Products & Services “Missed Opportunity” Zone 2,302 Credit Unions Focus in CDFI Low-Income and Investment Area Target Markets
15 Can we look deeper? Key QuestionsCredit migration measures changes in credit scores & risk of individual loans What is the institutional impact of deeper CDFI lending on financial performance & growth? Aggregate data provides valid risk measure for total portfolio & net impact on member credit scores Do CDFI credit unions have a measurable impact on financial capability of members? Do CDFI credit unions lend deeper into CDFI Target Markets than their mainstream peers?
16 Can we look deeper? Thanks! Randy Thompson, PhDCredit migration measures changes in credit scores & risk of individual loans Aggregate data provides valid risk measure for total portfolio & net impact on member credit scores Thanks! Randy Thompson, PhD CEO, TCT Risk Solutions
17 Credit Migration MatrixOriginal FICO Scores Current FICO Scores
18 Opportunities & Risk MitigationImproving credit scores show opportunities for targeted marketing and cross-selling Deteriorating credit serves as early warnings for targeted and timely contacts and counseling services
19 Lending Deeper in CDFI Target Markets48% of CDFI loans in Tiers 3-6
20 Lending More EffectivelyCredit unions with credit migration tool tend to show positive net improvement of scores across all borrowers The median CDFI credit union showed greater gains in net credit scores 7% net gain for CDFIs 4% for non-CDFIs
21 Lending More ProfitablyCDFIs deployed a much higher proportion loans to borrowers in lower credit tiers, yet recorded a significantly higher ROA than non-CDFIs with more conservative loan deployments This is consistent with results recorded in fiscal years 2013, 2014 and 2015 Data through September 30, 2016 shows a continuation of this trend Type of Credit Union in the Sample Return on Average Assets FY 2015 CDFIs 0.70% Non-CDFIs 0.41%
22 What it means to be a CDFI?Community Development Financial Institution Lending deeply Lending profitably Lending effectively It means… Fulfilling historic credit union mission of serving people of modest means Focusing on markets that offer the highest potential for credit union growth and financial returns Using the best tools at our disposal to look after the financial health and capability of our members
23 What it means to be a CDFI?Community Development Financial Institution Lending deeply Lending profitably Lending effectively Notes Preliminary observations from limited number of institutions are illustrative, not yet conclusive Deeper dive and case study analysis will yield more information on better and promising practices Value of credit migration analysis for risk mitigation, regulatory compliance and impact on financial capability of members.
24 For More Information Terry Ratigan Randy Thompson, PhDSenior Consultant (914) Randy Thompson, PhD CEO (208)