How CDFI-certified institutions help their community

CDFI-certified institutions use government and private funding to help underserved individuals and small businesses achieve their dreams. We talk to some of the community banks about how—and why—it works.

By Susan Thomas Springer

From a poultry farm in Mississippi to a Native American arts organization in South Dakota, the Community Development Financial Institutions (CDFI) Fund makes loans available in communities where access to capital is scarce.

CDFI, an arm of the U.S. Department of Treasury, was founded in 1994 to provide economic opportunity to underserved people. The CDFI Fund awards loans to institutions dedicated to promoting development in communities where individuals, businesses and nonprofits have difficulty finding traditional financing. The loans can help a family to afford their first home, a minority business owner to start a company or a nonprofit to open a health center. To date, the fund has distributed more than $2.3 billion through certified institutions around the country. There are more than 1,000 CDFIs across America that leverage federal dollars by partnering with private investors.

“CDFIs provide funding to small businesses that they would not likely be able to obtain conventionally,” says Ann Marie Mehlum, a retired community banker who recently ended a term on the CDFI Fund Advisory Board. “It takes a village. It takes conventional lenders and community organizations in partnership to help with funding to get certain economies going.”

Becoming certified boosts banks’ ability to serve their communities. However, Mehlum says if the designation isn’t a good fit, community banks should still know the CDFIs in their market so they can either partner with them or provide a referral.

How certification works
To achieve CDFI certification, banks must submit an application and meet several criteria, including having a primary mission of promoting community development, serving a targeted population and providing educational services.

Specifically, applicants must direct at least 60 percent of their financing activities to one or more eligible target markets. Targeted populations can be either investment areas (must meet certain economic distress criteria); low-income targeted populations (must meet the criteria within a specific geographic area); or other targeted populations (with significant documented unmet capital or financial services needs). Institutions must report annually to the CDFI Fund to maintain their CDFI certification.


CDFI funding distributed
by certified institutions since 1994

CDFI certification was a natural fit for Beneficial State Bank. At the end of 2016, 87 percent of the bank’s loan dollars went to mission-aligned borrowers and uses. The Oakland, Calif., bank already had the triple-bottom-line objectives of social justice, environmental resilience and economic stability. However, the certification did require the bank to have a staff dedicated to CDFI activities.

“It is a significant resource allocation in terms of the application and managing the process, but the rewards for the community justify the resource allocation,” says Daniel Skaff, co-chief executive of Beneficial State Bank and Albina Community Bank, which hold $901 million in combined assets.

Allocated funds must be tracked to ensure the money is serving its intended purpose, a job which Skaff says may require an additional staff member. It’s an investment he says pays off in the form of marketplace differentiation and the ability to serve the community: “Having the designation helps people understand that’s your primary focus.”

Helping the underbanked

Certified banks must provide educational services to their communities. That’s a requirement $2.7 billion-asset BankPlus more than meets through a variety of financial literacy programs. Based in Belzoni, Miss., BankPlus has served primarily rural, lower-income communities since it was chartered in 1909.

“We’re based in one of the poorest regions in the US with double-digit unemployment rates in the best economies, so we’re used to serving people who are underbanked,” says Max Yates, senior executive vice president and chief risk officer at BankPlus. In 2009, BankPlus became CDFI-certified to extend its commitment to small-dollar loan programs and financial literacy. BankPlus is active in several school programs, including Teach Children to Save, an American Bankers Association program that helps K-12 students learn about budgeting, saving, recognizing needs and wants and how interest makes money grow.

North River Boats

Brent Hutchings had big dreams for North River Boats when he became CEO in 2012.

It’s headquartered in Roseburg, Ore., near the Umpqua River, a world-class waterway for fishing, kayaking and rafting. Naturally, many North River Boats employees love to design and craft fishing boats and set them afloat on the Umpqua.

The economic recession came close to drowning the company. “Finding financing to buy the company was somewhat challenging, given the lack of operating history under new ownership,” Hutchings says.

Help came from the Oakland, Calif., Beneficial State Bank, which provided debt financing that allowed Hutchings to buy the company in 2014. Compared with other financing options, Hutchings says Beneficial provided a larger and more flexible debt facility, giving him more comfort in his decision.

The company revenue has tripled since 2012 and more than doubled employment to 132 employees, making North River among the largest private employers in town. In April 2017, Beneficial also financed a multimillion-dollar employee stock ownership plan (ESOP) to meet Hutchings’ desire for his employees to share in the company’s success. Beneficial won the ESOP transaction financing over two nationwide banks thanks to “greater flexibility and more dry powder.” Hutchings also credits Beneficial’s bankers for taking the time to learn about his business so they understood how an ESOP would be a win for the Roseburg community as well as for the business.

Today, North River builds 350 boats a year, ranging from $50,000 recreational boats to $2 million commercial vessels, including Alaskan whale-watching boats and government vessels for the Navy and Coast Guard.

New owners—North River Boats CEO Brent Hutchings; his wife, Chrys; and Beneficial State Bank banker Matt Anderson (front, center) with North River Boats employees just after the employee stock ownership plan announcement.

Another BankPlus program focused on homeowner stabilization has modified 151 loans totaling $12.8 million. Its CreditPlus Program boosts financial literacy, asking participants to complete a financial literacy seminar before receiving a short-term loan, which BankPlus encourages them to use to pay off outstanding debt and reestablish their credit. More than 26,000 people have completed the program.

“We’ve grown customers. Now they’re in mainstream banking and coming back for car loans, so we created a new program called CreditPlus Auto where they can buy a new or used car at a very favorable interest rate,” Yates says.

Learning opportunities
Beneficial State Bank also offers a range of education programs, from informal coaching for small-business customers to more formal financial programs. Since 2011, more than 19,000 people have attended their free money-management seminars.

“We find it useful through education programs to help people understand the basics of financial management and economics relevant to their financial situations,” co-CEO Skaff says.

But could CDFI funding be under threat? The Trump administration’s proposed 2018 budget, released in March, would drastically reduce CDFI funding. Mehlum says a key strategic goal of CDFI is to develop metrics to better quantify the economic impact of CDFI funding.

“More general education about the benefits of the CDFI Fund to small businesses will help ensure its continued funding and growth,” she says.

CDFIs leverage $12 of private capital for every $1 of public investment. Skaff points out it’s an effective way for the government to create jobs, grow businesses and build livable communities. “We need to continue to wave the flag related to the value provided for our communities by the CDFI programs, push the opportunity and advocate for a fulsome allocation to the CDFI programs in the 2018 federal budget.”

Susan Thomas Springer is a writer in Oregon.