Despite Overall Growth, Serving Low-income Communities Presents Unique Challenges
(August 4, 2009 – New York, NY) The past year will certainly be remembered for the devastating financial meltdown that gripped America and much of the world. Oil and gasoline prices hit new highs; on Wall Street, Lehman Brothers filed for the largest bankruptcy in history; unemployment rates soared; consumer demand plummeted; and all the major stock indexes showed record losses.
While many have speculated on the effects of the current economic climate on low-income communities, the Federation has just released a new report, Financial Trends in Community Development Credit Unions: 2008, which provides a statistical analysis as of year-end 2008 for 209 community development credit unions (CDCUs) nationwide. These institutions, all members of the Federation, operate in low-income urban, rural, and reservation-based communities across the nation, providing affordable credit, financial education and counseling, and other lifeline services to their low- and moderate-income members.
Based on the Federation’s research, the impact of the economy on CDCUs throughout 2008 was mixed. There were overall increases in total assets and membership served, as well as modest growth in real estate, commercial and industrial, and member business lending. The report also found that while CDCUs experienced solid asset growth of 5.2% ($224 million on a base of $4.3 billion), this figure outpaced the 2.13% growth in their net worth, causing their aggregate net worth-to-asset ratio to decrease from 10.29% to 9.99%.
An area of difficulty for many CDCUs continues to be managing their operating expenses. “It is in the nature of the CDCU business that expenses exceed those of credit unions which do not primarily serve low-income populations,” said President/CEO Cliff Rosenthal. “The driving factors include small average share and loan balances, limited payroll deductions, the typically small size of the institutions themselves, and the high level of personal service required in low-income communities.”
These difficulties, coupled with massive unemployment and high foreclosure rates, contributed to the loss of 18 CDCUs in 2008 (9% of the Federation’s total membership) due to mergers and liquidations, on par with the highest losses of the past 10 years. So while CDCUs and credit unions in general, did not engage in the “toxic,” anti-consumer lending that caused much of the economic turmoil in America, the impact on CDCUs with their mission of serving low-income communities has been disproportionately high.
“The loss of so many CDCUs (most of which are low-income designated and CDFI certified) represents a terrible blow for the underserved communities these institutions serve. Without them, many communities will be left without access to affordable financial services, not to mention vital developmental services such as the financial education and asset-building programs that these institutions have historically provided,” explained Federation Director of Membership Services Pablo DeFilippi. “Typically, except when CDCUs are allowed to merge wither other CDCUs, we have invariably witnessed the closing of branches in the lowest-income neighborhoods, further disfranchising those communities.”
Based on the Federation’s analysis, sustaining growth while controlling delinquencies and operating costs, will continue to be a major challenge for CDCUs. “With the low-interest rate environment, many CDCUs are having trouble generating sufficient income from their loans and investments to offset their expenses,” explained the Federation’s Community Development Investments Director Alice Greenwald. “We’re doing all we can to help CDCUs weather the financial crisis, such as by providing our members with secondary capital, which is deeply subordinated debt that can be counted as institutional net worth, but the demand from our members far exceeds our resources.”
Some good news for CDCUs came from the Community Development Financial Institutions (CDFI) Fund of the Treasury Department, which in June awarded $17 million in grants to nine CDCUs – the largest investment in many years. “These major awards will be enormously helpful in expanding the capacity of CDCUs to serve their communities,” Rosenthal said. In addition, the Federation has pressed the National Credit Union Adminsitration (NCUA) to convert low-interest loans from its Community Develoment Revolving Loan Fund (CDRLF) into secondary capital loans to help boost the net-worth ratios of low-income credit unions, which will help them sustain their growth. NCUA has determined that it has the power to make such a change by regulation, but no action has yet been taken by the agency.
FY 2008 Financial Trends Analysis of CDCUs Key Findings:
- Membership at CDCUs grew by 20,650 from 1,016,129 to 1,036,779, a 2.0% increase (FICUs: 1.6%).
- Profitability, as measured by return on average assets (Net Income/Average Assets), decreased from 1.01% to 0.06% (FICUs overall showed a decrease from 0.64% to 0.31%).
- Net Worth increased by $9 million or 2.13% (FICUs: increased by 3.3%). The net worth-to-assets ratio decreased from 10.29% to 9.99% (FICUs: decreased from 11.4% to 10.9%).
- Assets rose to $4.53 billion, increasing by $224 million or 5.2% (FICUs: +7.2%).
- Loans increased by $208 million or 6.27% (FICUs: +7.08%). Loans to assets increased from 76.98% to 77.75% in 2008. (FICUs decreased from 69.94% to 69.60%).
- Delinquent loans as a percentage of total loans increased from 2.25% to 2.88% (FICUs overall showed an increase from 0.93% to 1.37%). The net charge-off rate increased from 0.76% to 1.20% (FICU charge-off rate increased from 0.51% to 0.85%). The median ratio in 2008 was 3.79%, up from 3.43% in the prior year.
- Operating Expenses were 5.16% of average assets (FICUs: 3.40%), increasing by 8 basis points from year-end 2007.
- Shares (Deposits) increased by $250 million or 6.58% (FICUs: +7.7%).
- Eighteen CDCUs were merged or liquidated.
The Federation’s Financial Trends reports are released semi-annually. The full FY2008 report is available by clicking here.
© 2009 National Federation of Community Development Credit Unions.