Key minority bank casts a wider net

Financing: A key lender within the region's minority community has formed two subsidiaries to free itself of banking limitations that restrict its ability to help.

October 21, 2002

Harbor Bankshares Corp., for two decades a key lender within the region's minority business community, has formed two subsidiaries that its leaders say will help it spur economic development in and around Baltimore.

Bank officials said the new subsidiaries - one a not-for-profit and the other a for-profit entity - will make it easier for Harbor and some partners to finance community projects.

"We're much more than just a bank," said Joseph Haskins Jr., Harbor Bank's chairman and chief executive officer. "We've evolved as we've identified gaps - the gaps in financing - that are vital for our community to continue to grow.

"Our goal is not to be a big, huge global bank. Our goal is to be a significant owner of this market, the market we know best. This [will] do so many good things for the community."

Harbor has grown to more than $200 million in assets by focusing on that role as a community bank.

An early lender to small businesses, churches and nonprofit organizations, it has recently become a mainstream participant in the region's commercial real estate market.

In 1994, Harbor formed a financial-services subsidiary that currently manages almost $60 million in public and private money.

"They have displayed a high level of commitment and community sensitivity," said the Rev. Johnny Calhoun, whose Mount Olive AME Church in Annapolis has been a repeat Harbor Bank customer.

The new subsidiaries mark Harbor's next step, Haskins said. The not-for-profit subsidiary is a community-development corporation, or CDC, and will operate as Harbor Bank of Maryland Community Development Corp.

The for-profit unit is a community-development entity, or CDE, and will operate as Harbor Bank of Baltimore Metropolitan Area Development LLC.

Together, the units give Harbor - and its corporate, institutional and civic partners - the chance to accomplish much more than the bank could by itself, Haskins said.

"It's part of our evolution," he said. "It's important to bring financial resources into the community where they are needed" the most.

Banks face certain limitations. They generally can't make grants, can't concentrate too much of their loan portfolio in one industrial sector, or with one type of client, and they have to be fairly strict about a customer's creditworthiness. The amount of money available for lending depends on the amount brought in from depositors.

With the CDC and CDE subsidiaries, Harbor will be able to raise private capital from companies, other banks, foundations and other civic organizations. That will make creative financing possible, Haskins said.

With the not-for-profit CDC, money brought in as grants may be "passed through" to customers and mixed in with conventional loans, which would decrease the cost of financing a project.

By creating the CDC and CDE entities, Harbor is embracing a fairly unusual strategy for banks, said James C. Record, director of bank research for SNL Securities in Charlottesville, Va.

In addition to making money, "it sounds like they are [extremely focused on] doing public good," Record said.

Haskins emphasized that the bank isn't talking about deals that are "risky or nonsensical," and he said the subsidiaries will reduce Harbor's overall risk, particularly because the bank will bring in outside capital and involve outside partners in its projects.

The for-profit Harbor Bank of Baltimore CDE is designed to take advantage of the federal new-markets tax-credit program, under which the bank applies for federal tax credits and uses them to attract money from outside investors.

Those investors can profit in two ways. First, in addition to retrieving their original investment, they are eligible to receive their fair share of profits generated by the venture they helped finance.

Second, these investors can get tax credits worth up to 39 percent of their original investment, paid in increments over a seven-year period.

Harbor has applied to the Treasury Department for $100 million in tax credits, which would allow it to raise up to $100 million from investors. But Haskins said that because only $2.45 billion in tax credits are available nationwide in this first round of awards, he expects Harbor's award to be less than the requested amount.

The award announcements are expected by mid-December.

The bank's not-for-profit Harbor Bank of Maryland Community Development Corp. will look to raise $10 million, which would enable it to make loans and grants to other area projects. That subsidiary will focus on churches, not-for-profit organizations and "businesses with tremendous economic significance," Haskins said.

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