Volume 10; No. 2; Spring 1998
Study Identifies Eight Core Characteristics of Successful Multi-Bank
Commissioned by NationsBank Community Investment Group
Conducted by Shorebank Advisory Services
Multi-bank community development corporations (CDCs) have evolved tremendously
in recent years, and many have become viable, savvy, financing vehicles
through which to serve low-and moderate-income communities around the
country. The role of these financial intermediaries has remained fairly
consistent, but the composition and expectations of their investors has
changed significantly. Large financial institutions have become creatures
of Wall Street, and are, therefore, reliant upon strategies that create
greater cost efficiencies. Small and mid-sized financial institutions
have recognized the opportunities inherent in large-bank streamlining,
and have staunchly maintained a "high touch" approach to banking.
Community development intermediaries offer benefits to both groups. By
assuming the role of subcontractor to their bank investors, multi-bank
CDCs can provide the expertise and capacity that small and mid-sized financial
institutions cannot often afford. At the same time, these intermediaries
can provide large financial institutions an effective way to reach underserved
populations through products and services that would be unprofitable if
While many multi-bank CDCs are achieving success, others are struggling.
The problem may stem from a lack of market discipline found in the other
subsets of the financial industry. Are these community development intermediaries
immune from the rewards and punishments that guide other businesses? Experience
has shown that these organizations have been held to more flexible standards
by their investors. An increasingly competitive environment dictates that
this flexibility may no longer be acceptable. The next few years will
likely be challenging ones for multi-bank CDCs, but the keys to success
will be to ride the cutting edge, manage the risks, measure the impact,
and "play" according to the rules of the marketplace.
NationsBank Community Investment Group and Shorebank Advisory Services
recently completed a review of multi-bank CDCs involved in small business
finance. Multi-bank CDCs are vehicles through which banks can support
lending activities in markets they cannot reach efficiently or effectively
themselves. Banks provide debt or equity to invest in these entities,
which then re-lend the funds to borrowers. Although funneling bank dollars
through financial intermediaries can be a successful strategy for reaching
"downmarket," the multi-bank CDC model has had difficulty achieving
success in terms of generating significant business loan volume or maintaining
a strong financial position.
Many CDCs open their doors for business without a comprehensive plan
or structure, which directly affects their ability to address market needs,
achieve significant impact, become financially stable and attain self-sufficiency.
The success of a multi-bank CDC can be significantly hindered in its early
years if it is not run in a lean, efficient manner by dedicated and experienced
staff. Early success can further be hindered if relationships with bank
investors are not maximized. CDCs must draw from the pro-active support
of its member banks, particularly in obtaining solid referrals from bank
loan officers as well as in-kind support. In-kind support is vital for
the vast majority of CDCs, whose bank investors can provide loaned bank
executives, outsourced loan servicing, or donated office space.
CDCs capitalized with equity or low- or zero-interest loans are able
to passively earn income from idle funds, often a critical source of revenue
in the early stages of CDC operation. In the absence of a portfolio of
larger loans or high balances of idle funds from which to earn interest,
a CDC will continue to rely upon in-kind support and operating grants.
Most CDCs do need considerable subsidies in the early years, but while
a low or zero cost of funds is ideal for the CDC, it may not provide enough
financial return for prospective banks considering long-term membership.
To reach the markets that banks cannot effectively serve, the CDC must
work with "high-touch" customers, which requires a considerable
amount of time for underwriting and technical assistance. The interest
income from these loans, particularly loans under $25,000, might b e insufficient
to cover the total costs associated with the loan. Originating larger
loans to earn additional income helps the CDC become self-sufficient,
but moves it closer to the customer-base served by its member banks. This
paradox illuminates the classic struggle of CDCs: balancing the goals
of its organizational mission with the need for financial sustainability.
Multi-bank CDCs struggle, like other types of community development financial
institutions (CDFIs), to provide financial services to unserved or underserved
communities, while remaining safe, sustainable financial intermediaries.
Through the study commissioned by NationsBank, eight standards (and several
more sub-standards) were identified that appear to represent the "norm"
for successful CDCs. These standards should certainly be considered when
establishing or investing in CDCs, but they are not meant to be inflexible
rules that CDCs must follow. Rather, the guidelines represent standards
to which several viable CDCs conform, and illustrate some of the ways
common issues have been addressed.
Eight standards for success include:
Management: with an emphasis on credit experience, early involvement,
a dedicated and lean staff, and performance-based compensation.
Organizational Structure: appropriate choice of for-profit versus
nonprofit designation, the composition of the loan committee and board
of directors, organizational affiliations and accountability.
Program Strategies: a clear mission of the CDC, market discipline,
a sizable service area with adequate demand, flexible policies including
the role of bank participation, prudent underwriting/eligibility criteria,
access to or the provision of technical assistance, and a viable exit
strategy for investors.
Delivery Of Products: sufficient loan volume, volume per staff,
loan size, income per loan in the portfolio, and cost efficiency.
Management: proper management of loan loss reserves, delinquencies,
Capitalization: and cost appropriate size, structure
Subsidy/In-Kind Support: sufficient amount and appropriate structure
of the support
Reaching Break-Even: management surrounding self-sustainability.
CDCs and their member banks need to work together to ensure that their
targeted businesses are served, while also developing the CDC into a self-sustaining
organization. While many multi-bank CDCs have had difficulty becoming
"successful," in terms of significant loan volume or financial
condition, several CDCs, as high-lighted in the NationsBank/Shorebank
study, have made significant progress in these areas.
For a copy of the multi-bank CDC guidelines, please contact Shorebank
Advisory Services at (773) 288-0066 or write to Mary Schultz, NationsBank,
CDFI initiative Manager, 1605 Main Street, Suite 502, Sarasota, Florida
Shorebank Advisory Services
Shorebank Advisory Services (SAS) is the advisory and consulting subsidiary
of Shorebank Corporation, a bank holding company and one of the leading
development finance institutions in the United States. The firm provides
short-term and long-term advisory services in development finance, enterprise
development and community economic development strategies, bringing practical
management and operational experience to each of its engagements. From SAS's
major roles in many of Shorebank's expansions to its involvement in strategic
planning and design for mainstream and community development financial institutions,
the firm has a broad overview of the development finance field, as well
as the in-depth knowledge and skills needed for rigorous analysis, report
writing and creative design and implementation.