Fundamentals of the Opportunity Finance Industry Certificate in Community Development Finance

Transcription

1 Fundamentals of the Opportunity Finance Industry Certificate in Community Development Finance Day 1 Presentation Fundamentals of the Opportunity Finance Industry Certificate in Community Development Finance Durham, North Carolina January 17-19, 2018

2 Day One Introduction of Participants & Trainers Discussion History & Context of Opportunity Finance Industry 35 Years of CDFI Practice Where CDFIs fit in Financial Markets Guest Speaker Current Status of the Field Sustainable Strategies & Models of CDFI Growth 2

3 Introduction Groups of 5-6 Pick a note-taker Go around your group each person briefly shares: Name Organization they work for One burning question they want to explore during the course The note-taker will report out on burning questions your group wants to explore 3

4 Key Institutions 1900 The Desjardins Group The largest association of credit unions in North America (founded in Lévis, Quebec by Alphonse Desjardins) 1903 First Credit Union in U.S. St. Mary s in NH 1973 South Shore Bank founded Headquartered in Chicago; oldest and largest community bank 37 years of operation stabilizing and rebuilding Chicago s lowincome neighborhoods 1979 Institute for Community Economics (ICE) formed One of first loan funds; originator of community land trust Housed OFN (formerly NACDLF) at inception in

5 Key Moments for the CDFI Industry CDFIs Making History 1964 Johnson s War on Poverty Civil Rights Act 1994 Creation of CDFI Fund 1977 Community Reinvestment Act 2008 Financial Recession and Mortgage Crisis 5

6 The Community Reinvestment Act An act of Congress enacted in 1977 with the intention of encouraging depository institutions to help meet the credit needs of surrounding communities (particularly LMI neighborhoods). CRA requires federal regulators to assess the record of each bank or thrift in helping to fulfill its obligations to the community. This record is used in evaluating applications for future approval of bank mergers, charters, acquisitions, branch openings and deposit facilities new CRA regulations Key motivator of bank investment in CDFIs 6

7 Community Development Institutions & Partners Community Development Corporations Community Action Programs Grassroots Community Based Organizations Churches Workforce Development Agencies Microenterprise Programs Cooperatives - housing, consumer, worker Community Development Financial Institutions banks, credit unions, loan funds, venture capital funds 7

8 CDFIhistory.ofn.org Evocative Oral Histories with industry pioneers Interactive Industry Timeline of key moments in CDFI history Illuminating primary-source Resources that influenced a movement and an industry Inspiring Videos that tell the CDFI story 8

9 35 Years of CDFI Practice SOCIAL, ECONOMIC, AND POLITICAL JUSTICE BEST PRACTICES / PERFORMANCE TRANSFORMATIONAL CHANGE ORGANIZING / ACCOUNTABILITY GROW, CHANGE, OR DIE 9

10 35 Years of CDFI Practice Social, Economic, and Political Justice Late 70s and Early 80s A response to racial and economic inequities Formation of community development loan funds Change structures for how capital flows Tension between making mainstream work better and developing alternative forms of capital CDFIs as civic institutions 10

11 35 Years of CDFI Practice Organizing / Accountability Mid 1980s Founded National Association of Community Development Loan Funds (1985) Reading: Who We Are, What We ve Learned, Where We re Going. Speech from Institute for Community Economics (ICE) Director Chuck Matthei which opened the 1985 NACDLF conference Need a business model that is sustainable Networking / Peer learning First conference (1985) Waltham, MA in converted convent 47 CDFI & ~$25 MM in capital 11

12 35 Years of CDFI Practice Best Practices / Performance Late 1980s-1990s Focus on performance-oriented (vs. big tent organization) Best practices for CDFIs Performance-based membership Performance-based financing CDFI Fund started (1994, Bill Clinton) Adopted performance-based focus Investment in balance sheet and organization 12

13 35 Years of CDFI Practice Grow, Change, or Die Early 2000s New business models of collaboration Improve productivity & efficiency Aggregate demand Increase scale and impact Expand relationships with mainstream markets Product innovations Expansion of coverage 13

14 35 Years of CDFI Practice Transformational Change 2005 Current CARS/Aeris TM Advocacy & Policy CDFIs eligible for Federal Home Loan Bank membership CDFI Bond Guarantee Program Brand evolution for mass market Opportunity Finance 14

15 35 Years of CDFI Practice Overarching Lessons Adapted From Taking Stock: CDFIs Look Ahead After 25 Years of Community Development Finance Mark Pinsky, 2001, President & CEO, OFN 1. An effective CDF system must work just outside the margins of conventional financial systems, while striving to generate change in mainstream ideas and practices. Government regulation can encourage the participation of the financial sector. 2. The CDF system is focused not as much on innovating new products and strategies, but on adapting conventional products and strategies to unconventional markets. 3. CDFIs are customized responses to distinct and unique market challenges. Different markets develop different products e.g. housing cooperatives, small businesses, community facilities. 15

16 35 Years of CDFI Practice Overarching Lessons (cont.) 4. Supply of community development capital often generates its own demand. Demand is hard to quantify absent a supply of capital 5. Financial capital drives CDF when it is coupled with human and intellectual capital. The development of appropriate products coupled with technical assistance to borrowers enhances both demand and performance. 6. CDF in the U.S. is fundamentally a poverty alleviation strategy with goals ranging from wealth creation to civic revitalization to social stability. 7. CDF requires an advocacy voice that speaks of and from the experience gained working effectively in unconventional markets. 8. Performance matters investment has increased in the field because CDFIs are good investments investors are repaid. 9. Government can play a key role by investing directly into the CDFI sector. The CDFI Fund has been a key player in growing the field. 10. It takes time to build a scaled, robust CDFI sector. 16

17 Financial Markets What are capital markets? What are capital markets in opportunity finance? What is the role of banks in opportunity finance? How are CDFIs different from other capital providers in the market? How do we improve access to capital markets? 17

18 CAPITAL MARKET 18

19 19

20 20 Where Do You Get the Money?

21 Meaning of Capital Market Capital Market is the part of financial system that is concerned with raising capital funds by dealing in shares, bonds, and other long-term investments. The market where investment instruments like bonds, equities, and mortgages are traded is known as the capital market. 21

22 Significance, Roles or Functions of Capital Market Mobilization of Savings Capital Formation Provision of Investment Avenue Speed up Economic Growth and Development Proper Regulation of Funds Service Provision 22

23 Major Suppliers of Funds in the Traditional Capital Markets COMMERCIAL BANKS INSURANCE COMPANIES BUSINESS CORPORATIONS RETIREMENT FUNDS 23

24 How big a part of the financial industry are CDFIs? Assets held by the 4 biggest banks in the US (JPMC, B of A, Citi, Wells Fargo): $8.1 trillion Assets held by all CDFIs: about $90 billion This equates to 1.1% of the assets held by the 4 biggest banks Institution Type Community bank All other banks CDFI nonprofit loan fund Average asset size* $280 million $17.7 billion $38 million * Sources: FDIC Community Banking Research Project, analysis of 2009 CDFI loan fund applications 24

25 Types of Capital Market There are two types of capital markets: Primary market The market in which shares, loans, bonds, and other securities are sold for the first time for collecting longterm capital. This market is concerned with new issues. The primary market is also called the new issue market. Secondary market The market in which the buying and selling of the previously issued securities is done. 25

26 PRIMARY MARKET SECONDARY MARKET Bank Bank Investors (Pension Funds, Retirement Funds, Insurance Companies) Mortgage Backed Securities (Bonds) Wholesale Mortgage Buyers Mortgage Company Loans/Mortgages Consolidated Loans/Mortgage Packages Credit Union Bank Purchase bonds; hold in investment portfolios Purchases bundled loans; sells securities (bonds) backed by mortgages Local (Retail) lenders make loans, bundle for resale A B C D E F G H I J Individual Borrowers 31

27 Bank Regulation/Financial Modernization/De-regulation Regulators control entry, assets, and liabilities Entry: Who can start a bank? Where? Capital requirements for start-up. Liabilities (deposits): capital requirements, liquidity requirements, reserve requirements. Assets (bank loans): types of loans, securities, geographical restrictions. Lending practices (e.g. consumer disclosures, Ability to Repay rules, usury laws) 27

28 The Concentration of Banking 2,277 bank mergers between Total number of banks and thrifts has declined by over 60 percent since 1980 Does your CDFI have a strong local banking partner? Do your bank partner investment decisions get made in the same place where your CDFI operates? 28

29 Capital Markets for CDFIs Banks & financial institutions Individuals Institutional investors (insurance companies, university endowments, corporations) Foundations Religious institutions 29

30 Guest Speaker Martin Eakes President & CEO, Self-Help 30

31 Current Status of Field What are CDFIs Who are Players in the Opportunity Finance Field Types of CDFIs CDFI Financing and other Products Resources 31

32 Community Development Financial Institutions WE BELIEVE IN OPPORTUNITY. FOR ALL. 32

33 What is a Community Development Financial Institution (CDFI)? Private, mission-driven financial institution benefitting low-income, low-wealth, and other disadvantaged people & communities Serves customers that cannot meet conventional collateral or underwriting requirements Provides innovative financing products and/or services as well as technical assistance Creates economic opportunity in the form of: Jobs Affordable housing units Community services Financial services for the underbanked and unbanked 33

34 About CDFIs CDFIs lend to: Community Businesses including small businesses, microenterprises, nonprofit organizations, commercial real estate, and affordable housing Individuals CDFIs are 100% dedicated to delivering responsible, affordable financial products and services that benefit individuals and communities CDFIs are profitable but not profit-maximizing. They put community first, not the shareholder 34

35 How CDFIs Work Access to capital is part of the long term solution to alleviate poverty and build healthy communities CDFIs strive to become a permanent capital resource in their communities Not a program that comes and goes at the whims of the funders, government and others This means CDFIs expect to be repaid! CDFIs cannot avoid risk, but must learn to manage it 35

36 Niche Players Strong market knowledge Market driven New products and models Long-term relationships with customers More patient than conventional financial institutions Technical assistance a critical component of relationship 36

37 A Bird s Eye View of CDFIs Source of Capital Equity (net worth) Debt Financing Financial Return + Impact Users of Capital Regulatory Motivated Investors $ Mission Motivated Investors $ Community Development Financial Institutions (CDFIs) $ Borrowers Yield Motivated Investors Small businesses, microenterprise, community service providers, housing developers, commercial real estate developer, and individuals $ 37

38 CDFI Institution Types Depositories Community Development Banks Community Development Credit Unions Non-Depositories Community Development Loan Funds Community Development Venture Capital Funds 38

39 CDFI Institution Types Community Development Institution CD Banks CD Credit Unions Structure For-profit Non-profit, Cooperative Regulation Capitalization Structure Sectors Served FDIC, Federal Reserve, OCC, OTS, and state banking agencies Insured deposits and equity Loans and depository services for housing, business, commercial real estate, and consumer National Credit Union Administration Insured deposits, secondary capital, and equity Promote ownership of assets and savings for individuals; affordable credit and retail financial services CD Loan Funds Primarily nonprofit; some for-profit Unregulated Unsecured and secured debt, EQ2, and equity (grants) Loans for housing, microenterprise, small business, community facilities, and commercial real estate CD Venture Capital Funds Typically for-profit Unregulated Equity (and potentially debt) Equity and debt with equity features to midsized businesses with high growth potential and social impact 39

40 Current Number of Certified CDFIs 233 Banks/Thrits and Holding Companies 20% 16 Venture Capital Funds 2% 557 Loan Funds 51% 299 Credit Unions 27% 1095 Total CDFIs Source: CDFI Fund, September 30,

41 Number of Certified CDFIs CDFI Banks CDFI Bank Holding Companies Credit Unions Loan Funds 1,200 1, Venture Capital Funds Source: CDFI Fund Lists of Certified CDFIs

42 Map of Native CDFIs Graphic by Native CDFI Network

43 Regulated Bank and Credit Union Industry Size 2,524 Low Income Credit Unions 5,696 Credit Unions 299 CDFI Credit Unions 5,787 FDIC Insured Banks 156 Minority Depository Institutions (MDIs) CDFI Banks MDI CDFIs Source: CDFI Fund list of certified CDFIs September 30, 2017, FDIC, NCUA 43

44 CDFI Asset Growth Total Assets of Certified CDFIs (Billions) $ $ $25 $14 $4 $ Source: Social Investment Forum, 2012 Report on Socially Responsible Investing Trends in the United States, 2015 data from FDIC, NCUA and trade associations, CDFI Fund

45 Measuring Success Financial and Social Returns Financial Preserving investor capital Returns CDFI financing has produced more than: 256,000 businesses 1,900,000 housing units 10,400 community facility projects 1,200,000 new or continuing jobs *Source: OFN s annual member data FY

46 Financing Products Loans Equity & Debt with Equity Guarantees Other Retail financial services Technical assistance & training Advocacy Real estate development Other 46

47 Types of Financing Small business and micro-enterprise Commercial Real Estate Affordable Housing Nonprofit Organizations Education: Charter School Financing Healthcare: Community Health Centers Health Food Financing: Food deserts Residential Mortgages & Home Repairs Consumer Finance: Alternative to Pay-Day Loans Venture Capital 47

48 Retail Financial Services Checking Accounts Savings Accounts & Other Savings Products Individual Development Accounts (IDAs) Check Cashing 48

49 Technical Assistance & Training Depends on needs of target market CDFI borrowers generally require some form of TA TA both before and after making a loan Examples: Housing & Facilities developing project budgets and plan; identifying and packaging other funding Micro & Business business plan; marketing; bookkeeping Individual financial literacy; credit counseling, homebuyer education 49

50 Other CDFI Products & Services Real Estate Development & Management Research Advocacy Other 50

51 Where CDFIs Work Rural Vs Urban Major Urban (MSA>1MM), 47% Minor Urban (MSA<1MM), 26% Rural (Not in MSA), 27% 51

52 CDFI Customers Higher percentages than conventional financial institutions to: 47 % Women Borrowers 73% Low Income Borrowers 54 % People of Color 52

53 Key Findings of OFN study: 20 Years of Opportunity Finance : An Analysis of Trends and Growth Over 20 years, OFN Member CDFIs had 15% average annual growth in loans outstanding Increases in lending during the Great Recession when bank lending contracted 16% Losses on par with FDIC-insured institutions Net Operating Margins above or close to FDIC-insured institutions

54 15% Avg. Annual Growth. Growth through Great Recession. $40,000,000 Average Loans Outstanding $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $0

55 Losses on Par with FDIC-insured Institutions 3% Net Charge Off Rate 2% OFN Members Overall 1% FDIC Inst. Overall 0%

56 Net Operating Margin above or Close to FDIC-insured Institutions 40% Operating Margin 30% 20% OFN Members Overall 10% FDIC Inst. Overall 0% -10%

57 Avg. Loan Portfolio by Sector

58 Avg. Sources of Borrowed Funds

59 CDFI Industry Infrastructure Industry trade associations and membership organizations Sector-based infrastructure 59

60 Industry Trade Associations and Membership Organizations Play a critical role in industry building: Financing Capacity building and consulting Advocacy Data & research Strategic leadership Industry initiatives 60

61 Industry Trade Associations and Membership Organizations Focus Website Aspen Institute Microbusiness aspeninstitute.org Association for Enterprise Opportunity (AEO) Community Development Banking Association (CDBA) Microbusiness CD Banks microenterpriseworks.org cdbanks.org Community Development Venture Capital Alliance (CDVCA) CD venture capital cdvca.org CDFI Coalition Advocacy - CDFIs cdfi.org National Community Investment Fund (NCIF) National Federation of Community Development Credit Unions (NFCDCU) Opportunity Finance Network (OFN) CD Banks & CUs CD Credit Unions CDFIs ncif.org cdcu.coop ofn.org 61

62 Opportunity Finance Network Leading national network of CDFIs investing in opportunities that benefit low-income, low-wealth, and other underserved communities across America Expand Access to Capital Manages more than $600 million in financing capital On-balance sheet financing fund, Bond, Off-balance sheet funds, NMTC Build Strength Signature convenings Annual Conference; Small Business Finance Forum, Regional meetings Trainings, capacity building, research Amplify Voice Advocate for Opportunity Finance Drives message that CDFI investments transform communities 62

63 Sector-Based Infrastructure and Resources Housing National Association of Affordable Housing Lenders Housing Partnership Network Small Business / Microenterprise Aspen Institute & AEO OFN s Small Business Finance Forum Consumer Financial Services Center for Financial Services Innovation Filene Research Institute CFED Charter Schools Community Health Clinics 63

64 cdficonnect.org Online platform for the CDFI Industry to network, collaborate, and learn. Features: Discussions Resource Libraries Events Calendars Advanced Search User Directory Special Interest Communities: Small Business Finance CDFI Women s Network (coming soon) Contact: Emily Tunney, Senior Associate, Knowledge Sharing etunney@ofn.org

65 Regulated vs. Unregulated Role of Regulator (e.g., NCUA, FDIC) Regulate & Charter Standards for financial statements e.g., Quarterly 5300 financial reports Review financial performance Unregulated Other systems and practices to develop standards and review financial performance Aeris TM Ratings Trade Associations Auditors Performance Counts 65

66 Ratings for CDFI Investments Purpose Increase flow of capital to CDFIs Promote CDFI performance as primary criterion determining flow of capital Focus on unregulated loan funds Products Rating - Comprehensive, third-party assessment of a CDFI s impact performance and financial strength and performance (2 ratings) Ratings on ~100 loan funds Purchased by subscribers Information Services & Quarterly Data aerisinsight.com 66

67 Sustainability Models and Models of CDFI Growth Business models Understanding your market Models to improve scale CDFI collaborations 67

68 Business Models of CDFIs Basic Models Money in Money out Sustainability Do we have cash Are we profitable Are we impactful Can we keep our business model running Scale 68

69 CDFI Industry Analysis - The Good News CDFIs have been stepping into the breach to address lending-related needs during the recession and have paid a financial price for doing so but that price has been relatively small and sufficient reserves were set aside to offset the small increase in delinquencies and defaults. CDFI portfolio performance has been mixed, but only for a minority of organizations is it an issue that significantly affects overall financial performance. Again, most CDFIs were sufficiently protected through adequate reserves. 69

70 The Maybe Not-So Great News Significant scale effects exist in all sectors of the CDFI industry i.e., larger CDFIs showed better performance measures. Larger CDFIs were more efficient, which was evidenced by: Lower combined interest and operating expenses Higher deployment rates Lower charge-offs Greater demonstrable impact 70

71 Understanding Your Market If you look at the growth of CDFIs, many of today s most successful groups have built their growth around a couple of key lending product. In small groups discuss: How did your CDFI decide what lending products to focus on? If you don t know / don t work for a CDFI how would you go about making this decision? What do you need to know about your market (meaning your potential borrowers) before you launch a loan product? Pick someone to report out the results of your group s discussion. 71

72 CDFI Models to Improve Scale As part of larger CDFIs growth strategies, many have developed business models to improve internal efficiencies and create more demonstrable community impacts. Such models have involved the following: Collaborations with other CDFIs and various network organizations Implementing shared service platforms Outsourcing a portion of their operations to a 3 rd party service provider Merging two or more CDFIs 72

73 Examples of CDFI Models Network Organizations ROC USA Federation of Appalachian Housing Enterprises Housing Partnership Network Shared Services CRF - Spark Outsourcing Community Reinvestment Fund LiftFund Mergers Craft3 Self-Help Federal Credit Union 73

74 Network Organizations What is a network organization? A group of legally independent CDFIs that use various methods of coordinating their activities and interactions in order to operate like a larger entity and serve more people more efficiently. What are the benefits of network organizations? Networks can be difficult to organize, but very effective when managed well. When should CDFIs consider network organizations? When the CDFIs have common goals, activities, and products. 74

75 ROC USA Network (ROC USA) Partnership among New Hampshire Community Loan Fund, The Corporation for Enterprise Development (CFED), and NeighborWorks America to support ROC and help organize the supply and demand for manufactured housing. Network of nonprofit community development organizations that enables resident ownership of manufactured housing parks. ROC USA operates three subsidiaries: A national network of nine TA providers. ROC USA Capital provides home financing and serves as a market-based system change strategy. CFED promotes policy change. 75

76 FAHE Coalition of 50 community-based nonprofits focused on making housing affordable and available to lowincome families. Mix of hub and spoke model (FAHE provides services to members) and spider web model whereby members are interdependent on each other. Offers centralized services to members: Loan servicing functions Mortgage originations and capitalization Multi-family development Loans to members Staff functions such as operational support, compliance, and HR 76

77 Housing Partnership Network (HPN) National network of 98 nonprofit members, primarily large regional developers and lenders. Helps members take a more social enterprise approach to innovation and learning. Initially organized as a community of practice, HPN is committed to innovation, performance of the sector, and performance of its members as businesses. Offers its members such services as: Peer exchange Policy development Cooperative enterprise 77

78 Shared Services What are shared services? Allow CDFIs to centralize back-office and other operations used by multiple CDFIs What are the benefits of shared services? Create efficiencies and eliminate redundancy When should CDFIs consider shared services? Multiple CDFIs performing same functions but at lowquality and high cost 78

79 Collaboration around technology the Spark program One such program has been developed by a CDFI, CRF based in Minneapolis. Spark contains core origination system elements such as: Customizable lending products and features Secure and intuitive borrower-facing loan application (including document transfer) Scalable and configurable document classification system Powerful portfolio reporting capabilities

80 Outsourcing What is outsourcing? Outsourcing is the contracting out of a business process to a third-party. What are the benefits of outsourcing? It can reduce costs and allow staff to focus on more important issues for the CDFI. When should CDFIs consider outsourcing? When you can access better service for lower cost (e.g., loan servicing). 80

81 Outsourcing Providers Community Reinvestment Fund (CRF): CRF is a national CDFI that offers other mission-based lenders the following services to increase efficiencies/scale: Loan servicing and troubled loan management Purchasing of loans on the secondary market Various types of back-office support including accounting, compliance, and investor reporting LiftFund Microloan Management System (MMS): A web-based platform for business loan originations, which allows for standardized underwriting and approval. 81

82 Merger Example: Craft3 Merger of three CDFIs in 2007 Craft3 (formally Enterprise Cascadia), Enterprise Pacific, and Cascadia Revolving Fund of Seattle into a regional CDFI The impact of the merger included: Doubling the size of Craft3 s capital fund Expanding the once rural CDFI s footprint into the urban centers of Portland and Seattle Introducing multiple business units that offer comprehensive products and services Leveraging of greater resources through internal collaborations 82

83 Merger Example: Self-Help Federal Credit Union SHFCU was created in 2008 through mergers with seven credit unions throughout CA, and it has become the fastest growing CU in the country with over $600 million in assets, 20 branches, and 80,000 members. Benefits of the merger: More services and better pricing for members. Access to ATM networks. Mortgage loans and other community facility loans now available. Systems consolidation to increase operational efficiencies. Experienced management for smaller credit unions. Self-Help able to raise uninsured secondary capital investments from government and social investors creating stronger institutions that can grow. 83

84 A New Model for CDFIs? There is no one size fits all model of CDFI but, in general, the CDFI field will serve more people and communities in need through: Increased collaboration and shared infrastructure Collaborative operating networks What are the impediments to building infrastructure and collaborative networks (i.e., costs, other)? 84

85 Research Question: What Makes CDFI Collaborations Successful? CDFI Collaborations: Keys to Success (Opportunity Finance Network, 2015) Background reading on collaborations Interviewed collaboration experts Developed a list of known CDFI Collaborations Selected and interviewed 12 collaborations representing different purposes and stages, as well as CDFIs from different sectors, institution types, sizes, ownership, and geographies 85

86 Why Do CDFIs Collaborate? Capacity Building Place-based Initiatives Sector-focused Initiatives Technology 86

87 Key Findings: 5 Success Factors Business Opportunities and Mutually Beneficial Goals Leadership from Within Roles and Responsibilities Performance Metrics Trust Also: Funding Sources and Organizational Structure JPMorgan Chase PRO Neighborhoods Program $125 million, five-year initiative funding CDFI collaboration 87