Charge‐offs and labor expense in community development financial institutions

Abstract Community development financial institution (CDFI) banks are mission‐oriented institutions committed to providing financial development services to customers in economically distressed communities. I examine the relationship between charge‐offs and two categories of noninterest expense among US community banks. Labor expense is more negatively related to charge‐offs for CDFI banks than non‐CDFI banks, but there is no similar relation between labor expense and nonperforming loans. These findings are consistent with CDFIs allocating proportionally more of their employee resources toward activities that reduce the likelihood of delinquent loans defaulting. Results for other noninterest expense are similar to those for labor expense but are less robust.