Community Developments Investments (May 2018)
Catalyzing Impact: NCIF Fosters Bank Partnerships With MDIs
Barry Wides, Deputy Comptroller for Community Affairs, OCC
Saurabh Narain, President and Chief Executive Officer, National Community Investment Fund
The East Baltimore Development Initiative used new markets tax credits, which is an eligible community development activity under the Community Reinvestment Act. (Redmellon Restoration & Development)
Minority depository institutions (MDI) play a vital role in the communities they serve by providing access to investment capital, financial products, and services that may not otherwise be available. As community-focused banks, MDIs have a unique understanding of their local markets and needs. MDIs leverage this knowledge to support small businesses, faith-based organizations, community facilities, real estate developments, and community members.
Historically, the first MDIs grew out of the pre-civil rights era providing banking services in underserved areas; later ones were founded to serve immigrant communities. Today, MDIs continue to play significant roles in minority communities in urban and rural areas throughout the United States.
Founded in 1996, the National Community Investment Fund (NCIF) is a nonprofit private equity trust and impact investor dedicated to increasing the flow of responsibly priced financial products and services in low- and moderate income (LMI) communities. The NCIF achieves its mission through three complementary lines of business: investing in mission-oriented financial institutions, most of which are MDIs or certified community development financial institutions (CDFI); using new markets tax credits (NMTC) to invest in high-impact development projects that benefit these communities, in partnership with the mission-oriented institutions; and using research to showcase impact.
The NCIF has invested tier 1 and tier 2 capital directly into MDIs to support the financial services they provide to LMI and minority communities. In all, the NCIF has invested in 58 mission-oriented financial institutions of which 23 were MDIs (current investments are in 14 MDIs). Together with other NCIF investments, these mission-oriented institutions have generated over $7 billion in loans in LMI communities.
Social Performance Metrics
To encourage high-impact projects, the NCIF provides metrics and information that banks can use to analyze potential partnerships, projects, and investments that may qualify them for Community Reinvestment Act (CRA) consideration. The NCIF considers impact as the foundation for all its investing and lending activities. The NCIF measures and demonstrates the social impact of its investments in communities with its unique and proprietary Social Performance Metrics. The NCIF developed its Social Performance Metrics to identify high-impact MDIs and other mission-oriented financial institutions as potential partners for banks with similar missions and goals. The metrics provide a suite of quantitative and qualitative data, including "mission intensity" data (see figure 1). Some of these metrics are available from the NCIF's search engines, www.BankImpact.org and BankImpact Maps (www.bankimpactmaps.org).
Figure 1: Mission Intensity of the NCIF's Portfolio of CDFI Banks and Minority Depository Institutions (2015)
Note: The Mission Intensity Index shows how much of a bank's lending is mission-related. It is the percentage of a bank's total annual lending that supports the bank's mission by 1) being located in a qualified census tract or 2) supporting a specific mission-relevant category. The figure shows the median percentage of 2015 lending by the NCIF's portfolio of CDFI banks and MDIs. The percentages do not add up to 100 because banks do other, non-mission intensity lending. For additional information, please see the NCIF report "Telling the Story: The Impact of the Reporting Banks and the Mission-Oriented Banking Industry."
The NCIF develops these metrics using the self-reported data received from banks and from publicly available sources, such as federal Home Mortgage Disclosure Act (HMDA) data. The NCIF analyzes this data to quantify and compare the social impacts of banks by the percentage of HMDA-reported lending and the number of branches in LMI areas and highly distressed U.S. Census tracts. The NCIF then assigns the banks to quadrants to help investors and consumers make informed banking choices (see figure 2). Banks exceeding the NCIF's "impact thresholds" are assigned to the upper-right quadrant and highlighted for potential partnerships. (For detailed information on the NCIF's quadrant rankings, visit www.ncif.org.)
The social performance metrics of MDI banks clearly show the banks' importance in their communities. As a peer group, MDI banks have a substantial presence in LMI communities, regarding both branch locations and lending. The median MDI bank has 57 percent of its branches in LMI areas, compared with 40 percent for the median bank in the United States. In addition, based on HMDA reporting, MDI banks are much more likely to lend in LMI areas, with 48 percent of MDI lending going to these communities, compared with just 26 percent for the median bank overall.
Figure 2: NCIF's Social Performance Metrics Illustrated by Quadrants
Note: The Development Deposit Intensity (x-axis) shows the percentage of a bank's branches located in low-and moderate-income census tracts. The Development Lending Intensity (y-axis) shows the percentage of a bank's mortgage lending volume in low- and moderate-income census tracts.
New Markets Tax Credits
In deploying NMTCs, the NCIF uses its own 3-Way Partnership Model to create relationships between mission-oriented MDIs and larger banks interested in impactful projects in LMI communities. The 3-Way Partnership comprises the following parties (see figure 3 for more detail on the structure):
- The NCIF, as the tax credit allocatee, selects projects that will benefit communities and involve mission-oriented banks as strong partners. Entities that are customers of NCIF partner banks often sponsor these projects.
- MDIs and other mission-oriented banks have participated in the 3-Way Partnership in one or more ways. First, an MDI can participate as a leveraged lender (lending within the NMTC structure) or as a direct lender (directly financing or sponsoring the project) to support its customer or build new customer relationships. The bank is able to book assets and income through the loans. Second, some banks joining in the partnership often provide depository services to the borrower. Third, all banks participating in the partnership gain experience and familiarity with the NMTC structure. Some banks that have gained experience through participating in the 3-Way Partnership have gone on to receive their own allocation. These banks can then participate in projects as co-allocatees. Finally, and perhaps most importantly, through participation in the 3-Way Partnership, mission-oriented banks can gain a relationship with larger banks.
- A large bank typically purchases the tax credits, turning them into equity for the project as part of the NMTC structure. In addition to the benefit of the tax credits, the large bank can develop a partnership with the mission-oriented bank and fulfill its CRA responsibilities. To date, the NCIF has completed 27 NMTC projects with 3-Way Partnerships, 11 of which were partnerships with CDFIs including MDI banks.
Figure 3: The NCIF's New Markets Tax Credits 3-Way Partnership
Note: For additional information on NCIF's New Markets Tax Credits 3-Way Partnership, please visit the NCIF's website.
The following two examples show how NMTC projects were used to leverage community bank and large bank relationships as well as positively affect communities.
Liberty Bank and Trust, a New Orleans MDI, partnered with the National Community Investment Fund and U.S. Bank to finance the Gateway Marketplace, Detroit's first major retail project in decades. (REDICO)
Detroit: Liberty Bank and Trust Partners on Gateway Marketplace
Liberty Bank and Trust, a New Orleans-based MDI, along with the NCIF and U.S. Bank contributed to the NMTC financing for the Gateway Marketplace in Detroit.
This new 350,000-square-foot retail center is the first major retail project in Detroit in over 40 years. The project remediates a 36-acre blighted and contaminated brownfield site and brings a fresh grocer to a federally designated food desert. Hundreds of new construction jobs and permanent jobs were created as a result of the development.
Liberty Bank and Trust entered the Detroit market in 2009 and has been very active in community revitalization efforts. By building relationships with public and private partners, Liberty Bank and Trust has made a substantial contribution to several high-impact housing and commercial revitalization efforts in Detroit.
Joseph Haskins Jr., Chairman and CEO of the Harbor Bank of Maryland, shows an award he received for the bank's community development work in East Baltimore. (OCC)
East Baltimore: The Harbor Bank of Maryland and City First Bank Partnership
The Harbor Bank of Maryland, City First Bank of DC, the NCIF, and U.S. Bank contributed to the $33 million in NMTC financing for the development of the 1812 Ashland project. The project, developed by the Forest City–New East Baltimore Partnership, includes lab and office space for local and national tenants that have research relationships with Johns Hopkins University (JHU), as well as additional companies attracted to Baltimore's emerging technology sector. The project created hundreds of construction and permanent jobs and generates significant economic activity in the local community.
This project is a key component of a larger, $1.8 billion initiative to revitalize the highly distressed community of East Baltimore, an area that has suffered from persistent poverty and high unemployment. East Baltimore Development Inc. (EBDI), a nonprofit organization established by community, government, institutional, and philanthropic partners to revitalize, re-energize, and rebuild East Baltimore, oversees the initiative. The Harbor Bank of Maryland has a long-term presence in the community and often acts as a catalyst for economic development in Baltimore. Joseph Haskins Jr., Chairman and CEO of the Harbor Bank of Maryland, who was instrumental in the formation of EBDI, believes that such partnerships have allowed local and national entities to leverage their strengths and maximize the impact of their investments in the community.
For more information on the NCIF and how to use its Social Performance Metrics, please visit www.ncif.org. Detailed information on the NCIF's impact analysis is available at www.bankimpact.org. Maps that can help investors and banks connect with geographically convenient partners are available at www.bankimpactmaps.org.
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.
This publication is part of:
Collection: Community Developments Investments
On the cover
Clockwise from top right, façade of a bank in San Francisco, Elouise Cobell, St. Luke Penny Savings Bank, Romana Acosta Bañuelos and James A. Conlon, a Freedman's Savings and Trust Co. passbook, Maggie L. Walker, and Frederick Douglass. (Photos courtesy of Alamy, AP Images, National Park Service, Bureau of the Public Debt, U.S. Department of the Treasury, National Park Service, and Shutterstock.)
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.