Profitwise News and Views Spotlight: December 2011

Recently Certified CDFI Banks and the CDFI Banking Sector
Last Updated: 12/20/11

The Community Development Financial Institutions (CDFI) Fund came into existence in 1995 with the mission to “expand the capacity of financial institutions to provide credit, capital, and financial services to underserved populations and communities in the United States.” Since the recent economic crisis, CDFIs have been a vehicle for the implementation of several new policy initiatives designed to direct capital to the nation’s underserved communities, businesses, and home owners. Though few in number, CDFI banks hold the majority of capital among certified CDFIs.

The CDFI banking sector grew by over 35 percent from 2009 to 2010 with the addition of more than 30 newly certified banks. The substantial increase in newly certified CDFI banks would suggest that the sector is doing well, but the situation is more nuanced. The majority of this growth took place following the launch of the U.S. Department of the Treasury’s Community Development Capital Initiative (CDCI), which required CDFI status in order to be eligible. This expansion would also suggest greater awareness on the part of community banks about the CDFI designation, and the possibility that more institutions may consider seeking certification. On the other hand, the financial crisis and ensuing recession have taken a toll on community banks, and CDFI banks are no exception. CDFI bank closures as well as anecdotal accounts indicate that CDFI banks face many challenges in the current environment. Many of the neighborhoods where CDFIs work have been particularly hard hit by the economic downturn. Many CDFI banks are restraining lending growth to maintain or improve capital ratios, as is true of many banks large and small across the country.

Thus the CDFI banking sector is currently in the midst of two divergent trends. One is banks with generally healthy balance sheets joining the sector; the other is weakening local economies in the places where CDFIs (and other community banks) lend and invest, impacting earnings and capital. Through an analysis of Uniform Bank Performance Reports (UBPR) and interviews with CDFI bankers, this article explores what recent certifications – those occurring since the CDCI money was made available in 2010 – mean for the strength, purpose, and stability of the CDFI banking sector. It reviews how sector growth affects lending capacity and bank strategies, and explores some of the new challenges that have arisen with the addition of many new banks to the sector. We conclude with some suggestions for what can be done to ensure that the sector continues to grow and address financial services needs in distressed communities.