Low Income Designation: Leveraging Regulations to Amplify your Impact in Low Income Markets

Transcription

1 Low Income Designation: Leveraging Regulations to Amplify your Impact in Low Income Markets

2 System Challenges Supplemental Capital: significant pressure to comply with net worth minimum requirements and/or limited their ability to generate positive earnings to sustain future growth. Member Business Loans: An increasingly larger number of credit unions are engaged in business lending or considering to enter into that space. FOM Expansion: CUs' ability to expand is limited now to multiple SEG charters. With over 70 million unbanked or underbanked consumers, this is a hugely under tapped market with tremendous growth potential for the future and relevance of credit unions.

3 NCUA LID Criteria More than half of a credit union s members live in census tracts that have a median family income below 80% of the Area Median Family Income (AMFI) or individual income less than 80% of Area Median Income (AMI) for a single individual.

4 Low-Income Designated CUs 2,134 LICUs as of December $238 billion in combined assets Serving 26 million consumers 430 have assets above $100 million. 53 have assets exceeding $1 billion. Currently one third of the CU system is LID! LID good for 5 years. Critical to measure benchmark on a yearly basis

5 Growth of LID CUs : Automated Notification : 1, : 2,134

6 Evolving Profile of LICUs $300, $250, Low-Income Designated Credit Unions: Total Assets (In Millions of $) $238, $200, $177, $150, $132, $100, $50, $37,372.1 $42,249.4 $47,365.5 $ Less than $5MM $5MM-$10MM $10MM-$50MM $50MM-$100MM $100MM-$500MM Greater than $500MM More and larger low-income designated credit unions

7 Growing market share of LICUs Low-Income Designated Credit Unions/ All Credit Unions Low-Income Designated Credit Unions All Credit Unions 7,710 7,491 7,240 6,960 6,687 6,402 1,086 14% 1,112 15% 1,120 15% 1,897 27% 1,992 30% 2,134 33%

8 Top 10 LID States Rank State Total Number of Credit Unions Total Number of LID Credit Unions % of State Total That are LID CUs 1. Pennsylvania % 2. Texas % 3. New York % 4. Louisiana % 5. Michigan % 6. Ohio % 7. California % 8. West Virginia % 9. Florida % 10. Mississippi %

9 Benefits of LID Exemption from the cap limiting member business loans to 12.25% of your portfolio The power to raise secondary capital loans The ability to raise insured non-member deposits from any individual or institution Access to the NCUA Community Development Revolving Loan Fund and grant program Deposits TA grants Access to NCUA Economic Development Specialists

10 Additional Benefits Ability to provide limited transactional services to non-members Ability to amend FOM to include associational groups formed for the sole purpose of making CU service available to LI persons (option only for multiple common bond CUs) Additional latitude in serving persons who are affiliated with the community. Those who participate in programs to alleviate poverty or distress, or who participate in associations headquartered in the community.

11 2010 Supervisory Letter Issued in response to Federation s advocacy Regulatory Flexibility Incorporated into Chapter 23 of the NCUA Examiners Manual it deals with low income credit unions. Educate your Examiner if they are not.

12 LID CUs: Leading the Way LICUs, CDFI CUs, CDCUs v/s Regular CUs Growing at faster pace than CUs with more traditional FOMs Have more flexibility to make up decreased income from loans and investments with fee income Have access to non-operating income (CDFI Fund and other funding sources) and alternative capital sources

13 Capital Structure of CUs CUs must meet basic capitalization requirements. Net worth must 7% to be considered well-capitalized (without substantial regulatory intervention) Net worth is defined as the credit unions equity divided by total assets. Historically equity was defined as the sum of a credit union s total regular + other reserves and retained earnings. Growth occurs incrementally through earnings.

14 Secondary Capital Loans In 1997, through the Federation s advocacy secondary capital was approved as a tool to grow net worth for low-income designated credit unions. Secondary capital is a subordinated loan that counts towards a credit union s net worth. These loans must be at least 5 years and typically interest only with a balloon repayment at maturity. However, the portion counted towards equity declines during the final five years of the loan.

15 Secondary Capital Loans SECONDARY CAPITAL ACCOUNTING % SECONDARY CAPITAL COUNTED TOWARDS NET WORTH 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% YEAR OF INVESTMENT NOTES PAYABLE SECONDARY CAPITAL COUNTED TOWARDS NET WORTH

16 Preliminary findings: Impact of Secondary Capital Low-income designated credit unions with secondary capital investments outperformed those without secondary capital investments in terms of asset, membership, and loan growth Low-income designated credit unions with secondary capital increased their primary capital Low-income designated credit unions with secondary capital increased efficiencies and earnings

17 Impact of Secondary Capital RETURN ON AVERAGE ASSETS (AGGREGATED, ) 0.90% COMPARATIVE CREDIT UNION GROWTH RATES (AGGREGATED, ) 18% 0.48% 0.38% 0.67% 0.42% 0.57% 13% 12% 5% 6% 7% 5% 11% 3% ALL CUS LIDS LIDS W/SC ASSETS MEMBERS LOANS ALL CUS ALL LIDS LIDS W/SC

18 Secondary Capital: Historic Perspective $300 U.S. Credit Union Industry: Outstanding Secondary Capital Loans (in Millions) $250 $200 $150 $100 $249 $245 $230 $218 $156 $50 $0 $ $ $28 46 $ Total Secondary Capital Invested in Credit Unions #CUs with SC

19 Secondary Capital: A new Chapter Amortizing Secondary Capital: Federation advocacy resulted in 2015 shift in regulatory interpretation of secondary capital rules Updates to Processing and Structure of Secondary Capital Loans, providing systematic review of amortizing capital requests Shift from balloon repayment to regular repayment of principal will reduce risk to investors and increase circulation of capital to promote community lending Federation establishes new secondary capital loan product and broadens investor partnerships, securing initial $10 million investment and $500,000 equity capital from large, national bank

20 Secondary Capital: A new Chapter Federation advocacy resulted in 2015 shift in regulatory interpretation of secondary capital rules Updates to Processing and Structure of Secondary Capital Loans, providing systematic review of amortizing capital requests Shift from balloon repayment to regular repayment of principal will reduce risk to investors and increase circulation of capital to promote community lending Federation establishes new secondary capital loan product and broadens investor partnerships, securing initial $10 million investment and $500,000 equity capital from large, national bank Change to prime market product Focused on high performing and growth credit unions serving majority lowincome communities

21 Leveraging Building Blocks Low Income Designation Regulatory flexibility to serve LMI markets Secondary Capital Grants FOM expansion opportunities TAG grants CDFI Certification Access to external resources Partnerships Impact tracking and reporting CDCU Capital: Access secondary capital, risk sharing deposits and low cost nonmember deposits Knowledge: Innovative LMI approaches and products; best practices; knowledge sharing; specialized consulting services (resource development). Impact: regulatory (NCUA s LID); external resources (CDFI Fund; US Treasury Department; SBA); national partnerships.

22 For more information National Federation of Community Development CUs 39 Broadway Suite 2140 New York, NY Pablo DeFilippi Vice President of Membership ext 304