With all the stories about banks below $1 billion in assets struggling to compete, a story about a small community bank returning to profitability with a community-oriented strategy deserves some attention. The Bank of Santa Barbara in California may only have around $100 million in total assets, but ever since a group of philanthropists took controlling interest of the bank in 2009, it has been working its way towards strong capital, high liquidity and steady growth—all while supporting community organizations.
The Hutton Parker Foundation, which supports community-oriented nonprofits, was one of the key investors in the 2009 buyout of The Bank of Santa Barbara. Thomas Parker, president of the Hutton Parker Foundation, recently spoke with Bank Director about the symbiotic relationship between his foundation and the bank.
Could you tell us about how the Hutton Parker Foundation and The Bank of Santa Barbara are working together, and how you came up with the idea?
Private foundations generally invest their money in Wall Street, and they are mandated to take 5 percent a year and donate it back to charity.
Once I started [working with the foundation] in 1996, I looked around and I said, “You know it’s great to give away the 5 percent, but is there something we can do with the invested capital?” In other words, instead of investing it in Wall Street, why don’t we invest in our own communities? So, I started making loans to nonprofits. I bought buildings and created nonprofit centers. Then, I went a step further and said, “Here’s an opportunity for the foundation to not only make a nice return, but also invest right in the community by buying stock in a local community bank.” I got a number of other foundations, along with other individuals, to do it with me. It seemed like a great way to invest.
Not only can I invest in a [community bank] with our capital and make a nice return, but there are synergies that take place as an investor. We have great insight into nonprofits. Nonprofit employees equal 10 percent of the workforce, so a lot of loans go out to nonprofits. Banks are kind of reticent [to make loans to nonprofits] because they don’t understand [them]. We have the ability to guarantee loans on certain projects if we know they are secure, and not only that, we know they benefit the community.
How is the foundation involved in determining which nonprofits receive loans?
It’s really the nonprofits themselves that come to banks. We don’t have much influence. The [bank officers] certainly ask me how I feel about this kind of a loan when nonprofits are involved, but as far as the day-to-day operations—no. I don’t influence the bank on whether they approve or disapprove a loan. I’m only there as a resource if the [officers] happen to have questions about the nonprofit’s capacity. This is a passive investment as far as management is concerned, but it’s an active investment as far as trying to work with the bank to make the community a better place.
So you have partial ownership of the bank?
The maximum amount of stock we can own in a bank is 20 percent. And once we go above 10 percent, generally, any foundation or corporation pretty much has to sign a passivity agreement, which works fine for us.
How many different foundations is The Bank of Santa Barbara working with?
I think right now there are probably three. There are two foundations and another major philanthropist owning approximately 50 percent of the bank stock.
What is the average loan The Bank of Santa Barbara makes to a nonprofit?
It varies from a $10,000 to $20,000 line of credit to a $3 million to $4 million secured loan for a building.
What happens in the event of a default on the loan?
If the foundation guarantees the loan to a nonprofit, the foundation would be on the hook in the event of a default. With most of the loans like that, they are buying a building or rebuilding a theater, and they have pledges from people we are familiar with that we know will be honored. They just need the ability to borrow in the interim until those pledges come in over two or three years.
Any advice you would give to community banks considering starting a relationship with a foundation?
Absolutely. Knock on the door and start the conversation. You never know the reception you will get, but it is certainly working in our case. It’s about running the bank for the community, and knowing that a properly run bank can make a nice profit and that profit can then be given back to the community. And I know that that resonates with depositors and with people that live within that community.
There are currently a lot of private foundations out there with more than $1 trillion in assets. That $1 trillion private foundations hold is primarily invested in Wall Street. There’s a trend right now for all of us in the private foundation field to look around and ask: “Is there a better way to invest our assets and still get a good return?”