CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu The argument that mainstream banks and thrifts cannot create an affordable & profitable alternative payday loan product is patent nonsense! Michael A. Stegman Presented at the Affordable, Responsible Short-Term Credit Conference Sponsored by Federal Deposit Insurance Corp. Washington, DC September 29, 2005

CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu Why NCSECU experience is important to payday loan debate Founded in 1937 with 17 members and $437 in assets, as of 2005, NCSECU has grown to 1.2 million members with more than $12 billion in assets. For all intents and purposes, SECU is akin to a big bank or thrift; If SECU can successfully market a more benign, affordable, and profitable payday loan product, all banks and thrifts can, if only they wanted to!

CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu The Supply Side of SALOs

CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu Comparing SALOs with other credit products 52,000 SALOs vs: –50,843 home equity lines of credit –66,730 1 st mortgage loans –113,200 active credit card accounts –151,600 open end personal loans

CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu Argument that conventional financial institutions cannot create a profitable payday loan alternative is patent nonsense! North Carolina State Employees Credit Union (SECU) created the Salary Advance Loan (SALO) in 2001 Since inception: –more than 52,000 customers –More than 1 million advances to date –$400 million total volume –11.75%/12% APR (1/40 th of typical payday loan APR) –$2.5 million in earned interest since inception Net loss of $1 million in SALO principal Net income of $1 million since inception –Average monthly volume is $12-$13 million

CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu Basic economics of SALO program Program Element Interest Rate12.0% (11.75% original) Loan Losses(0.27%) Cost of Funds(1.51%) (2.75% historical ) SECU Operating Costs(2.0%) To Retained Earnings8.22%

CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu Benchmarking SALOs Characteristics of SALOs $500 maximum advance $ average advance 28 days – average term 11.75%/12% -- APR 5% -- Amount of SALO must be deposited into special SALO savings account (instituted in March 2003) –6 months – duration of suspension of SALO privileges for withdrawing money from SALO savings account 1.40% -- # advances 60 days delinquent 0.27% annualized charge-offs as percent of total $ loaned 16.5% -- recoveries since program inception as percent of total charge- offs

CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu The Demand Side of SALOs

CENTER FOR COMMUNITY CAPITALISM THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE The Kenan-Flagler Business School at The University of North Carolina at Chapel Hillwww.kenaninstitute.unc.edu Who are SALO Customers? Gross monthly direct deposit wage/salary of SALO customer is $2,125/month, or $25,500/year. 79% of SALO customers have credit scores between Median age is around 38 4% -- SALO customers that have a SECU Credit $ average combined SECU share and money market account balances 65% -- SALO customers take out monthly advances