Cathi Kim’s office is just a few blocks from Wall Street, but she isn’t managing investment capital like most of her neighboring investment managers are. She’s putting money exclusively into credit unions that are doing community development work in some of the hardest places to do community development, places that mainstream banks have long neglected.
Kim pitches to some of the same investors Wall Street financial firms do, like foundations and insurance companies, but her portfolio at Inclusiv (formerly the National Federation of Community Development Credit Unions) includes 24 credit unions.
These investments, known as “secondary capital” in credit union parlance, aren’t about taking over credit unions. Rather the money helps credit unions grow larger, and faster, than they would be able to grow without it. Based in Jackson, Mississippi, Hope Credit Union had seven branches before the Great Recession, and now has more than 30 locations across the Deep South, from Jackson and the Mississippi Delta to Memphis, Tennessee, to Little Rock, Arkansas, to New Orleans. This past summer Hope opened its second branch in Montgomery, Alabama. Meanwhile, over the past decade the North Carolina-based Self-Help family of credit unions has expanded to six other states including California. Secondary capital has fueled the growth of both.
In September, Inclusiv launched the Southern Equity Fund, with the goal to double down and reach even deeper into the South, the poorest part of the United States. Inclusiv has raised around $45 million in capital so far for the new fund.
“When you look at where the deeper pockets of persistent poverty counties are, and where we see this very tragic and complicated story of racial wealth gaps, we couldn’t deny that there’s this huge pattern, it’s concentrated in the South,” Kim says.
More than a third of Inclusiv’s credit union members are already in the 17 states it defines as the South. But secondary capital investment remains largely concentrated in Hope and Self-Help. Those two credit unions alone account for a majority of all secondary capital invested in credit unions across the country, based on data from the National Credit Union Administration, the federal regulatory agency and deposit insurance provider for credit unions. With the Southern Equity Fund, one of Inclusiv’s goals is to bring more of its members into its secondary capital investment portfolio.
“There are less than 100 credit unions currently in the country that have secondary capital, but we know far more are able to leverage it successfully,” Kim says.
Secondary capital isn’t for every credit union. First of all, it’s only available to those certified by the National Credit Union Administration as a “low-income designated credit union” — meaning at least half the members come from low-income households.
“It is an unfortunate reality of where our country is that almost half of all credit unions in this country are now low-income designated,” Kim says.
In addition, secondary capital investments require prior approval from credit union regulators, including the National Credit Union Administration at the federal level and also a state regulator if the credit union is state-chartered. To obtain regulatory approval, eligible low-income designated credit unions submit a business plan showing how they will use the external investment to reach new members through new strategies, new branches, new products, or some combination of all the above. That’s often where Inclusiv can help, using its decades of experience making secondary capital investments in credit unions across the country.
Inclusiv has found secondary capital only really works when the credit union is already doing at least some of the groundwork required to reach deeper and further into communities that remain largely disconnected from the mainstream financial system.
Earlier this year, Inclusiv made a $2 million secondary capital investment in Park Community Credit Union, the fourth largest credit union in Kentucky. It was the credit union’s first-ever secondary capital investment, and it illustrates the kind of groundwork that Inclusiv really looks for in potential candidates for secondary capital.
“They were already doing the work,” says Kim.
Park Community Credit Union was chartered by the state of Kentucky in 1955, originally serving as the credit union for employees of the General Electric Appliance Assembly Park in Louisville, Kentucky. It has since expanded its charter to serve the geographic areas of the Louisville metro area, southern Indiana and the Lexington area. With nearly a billion dollars in assets, Park Community is already the fourth largest credit union in Kentucky. But a few years ago its leadership and board — who have always been predominantly white — realized that they weren’t reaching certain parts of their region.
“We saw that we are deficient in reaching out to some of these neighborhoods, especially the ones to be honest with you that we might have had some ignorance about as far as the prejudice, racial redlining, some of the things that’s occurred historically,” says David Shadburne, executive vice president at Park Community Credit Union.
Specifically, the credit union realized it wasn’t reaching the nine predominantly black neighborhoods of Louisville’s West End — the childhood home of Muhammad Ali — which has historically been redlined and denied the same access to home mortgage lending and small business lending as white neighborhoods.
“When you go into these communities where promises have been made and not been kept, you have to sit there and you have to listen, and you have to learn. You have to go in with a humble attitude and listen to the problems people are encountering every day,” Shadburne says. “They’re problems I might not understand or have had to experience in my lifetime because I have privilege that others don’t.”
Park Community Credit Union is trying to back up conversations with action. For example, the credit union wanted to make a commitment to provide home mortgages that would meet the needs of current West End residents and help keep them in place. They decided to lower their credit score threshold for a home mortgage to 585, the lowest in the city. Then they figured out a way to offer the mortgages without requiring private mortgage insurance — which can be a prohibitive cost barrier in Louisville’s West End because the number of vacant lots or abandoned houses makes these neighborhoods look like riskier investments requiring more costly private mortgage insurance policies.
Initially Park Community was going to offer these mortgages with adjustable interest rates — until a conversation with local stakeholders convinced them to offer them at fixed interest rates instead.
One of those local stakeholders was Russell: A Place of Promise, a joint effort by the city of Louisville and the national nonprofit Cities United, co-led by Anthony Smith, who has been working for 25 years in community development, most of it focused in Louisville’s West End.
“I don’t know of any other credit unions or banks in my world, [who] have come out and made these relationships with folks who are not their members yet but they’re hoping they will be,” says Smith. “When we think about Park, their commitment, talking to them, they keep figuring out how to make this better. They’ve been just a key partner as an institution.”
The credit union ended up making a public commitment to $7.5 million in home mortgages to families in the Russell neighborhood — and it’s already met $1 million of that commitment, Shadburne says.
As part of its strategic growth into the West End, Park Community Credit Union also began offering commercial “micro” loans, up to $10,000, at just 3.99 percent interest, for small businesses looking to start up or expand. If the small business repays the loan on time, the credit union refunds the interest to the borrower. The credit union also began offering a new payday-loan alternative product that is already up to $1.5 million in outstanding loans, according to Shadburne.
The secondary capital investment from Inclusiv has allowed the Park Community Credit Union to be even more responsive to community needs than it might have been otherwise.
“Without the secondary capital we wouldn’t be able to have some of these innovative products. We would not be able to have the same magnitude of impact or go as quickly into some of these areas,” Shadburne says. “We’re already talking about more secondary capital that’s going to allow us to go deeper, farther into these areas.”
Besides a bit of a cash cushion up front to go out and experiment with new products or new markets, the secondary capital also helps the credit union overcome the hidden barrier of regulatory oversight that often keeps mainstream financial institutions away from historically redlined neighborhoods because regulators believe those areas are too risky even if the financial institution is willing to take on the risk.
“Secondary capital helps you to overcome some of the concerns that regulators have that goes back to some historic bias,” Shadburne says. “In a lot of cases, the history has sort of built on itself to cause some of the issues we have today.”
UPDATE: An earlier version of this article incorrectly referred to Hope Credit Union and Self Help Credit Union as part of Inclusiv’s portfolio.
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.