A decade ago, in the last economic crisis, mainstream banks abandoned Dianna Bowser and the Southside Community Development and Housing Corporation, where she’s executive director. Founded in 1988, the nonprofit builds homes and provides counseling for first-time homeowners in and around Richmond, Virginia.

“They stripped us of our construction lines of credit,” says Bowser. “It was devastating.”

But that’s when Bowser first encountered Virginia Community Capital, a relatively new bank at the time. The bank stepped in to finance a major construction project for her organization. It has an unusual nonprofit ownership structure, a mission to serve underserved or disinvested communities, and startup capital that came from the state instead of private investors like most banks.

The relationship has grown ever since. Virginia Community Capital recently extended another loan allowing Bowser’s group to acquire a ten-unit apartment building and the vacant lot next door in Petersburg, a city about 20 miles south of Richmond and the site of Pocahontas Island, one of the first free Black communities in Virginia. The nonprofit is planning to build another 12 rental units on the vacant lot. It’s part of a strategy shift for the nonprofit to directly provide prospective first-time homebuyers stable and affordable places to live while helping them repair their credit, get out of predatory debt, or shift into better-paying careers.

It’s the first multi-family housing project that Bowser’s group is doing on its own, and it doesn’t yet have the funding lined up yet for construction — a situation that banks consider very risky, maybe too risky. Bowser says she did get a loan offer from a regional bank, the same lender that held the mortgage on the properties under the previous owner — but the rate it offered was higher than what she ultimately got from Virginia Community Capital.

“Once they read our strategic plan and understood what our board was trying to do, they understood the value of this project,” says Bowser. “We probably would not have gotten as good terms from any other bank.”

Loans like these aren’t a charitable endeavor for Virginia Community Capital. It’s the bank’s entire line of business. In just 2019, the bank made 124 loans, totaling $103 million across the state of Virginia to affordable housing or other community development projects as well as small businesses. According to federal records, the bank currently has more than 400 active small business loans, including around 250 loans for amounts under $100,000. (The bank’s minimum loan size is $50,000.) Seventy-percent of the bank’s lending goes to urban areas.

Other cities and states are now considering ways to use public dollars to create state-owned or city-owned banks as part of recovering from the COVID-19 recession. Downturns may be the best time to start a bank with a mission to serve underserved or disinvested communities. With its mission and its seed money from the state, Virginia Community Capital opened for deposits on August 20, 2008 — smack dab in the middle of the Great Recession.

“Other banks in the market had to double back on some of their credit,” says Jane Henderson, CEO of Virginia Community Capital. “We really didn’t have much of a loan portfolio, and $8 million of cash in our bank, so we were able to step into markets that had shut down because of the crisis.”

As banks go, in some ways Virginia Community Capital is just like other banks. It takes deposits and leverages them to create new money in the form of loans. It carries FDIC insurance covering most of its deposits. It’s subject to extensive oversight from the FDIC to safeguard deposits and minimize losses to the agency as a result of bank failure. It has access to near-zero interest loans from the Federal Reserve’s discount window. It’s also subject to the Community Reinvestment Act, a federal anti-redlining law that requires banks to provide responsible lending and other services to low and moderate income communities.

But Virginia Community Capital’s structure, while not totally unique, is exceedingly rare, and its origin story is even rarer. It’s technically a nonprofit bank holding company, with a handful of subsidiaries of which the banking entity itself is by far the largest. Its board of directors includes representatives from local governments and other public institutions across the state, as well as from the private sector.

The story of Virginia Community Capital actually goes back to 2005, when the state government of Virginia moved to privatize two state revolving loan funds, one for affordable housing and one for small business. The revolving loan funds together held $15 million in assets — $5 million in loans and $10 million in cash. Many cities and states have revolving loan funds like these.

According to Henderson, the thinking at the time was that, rather than being limited to $15 million in revolving loans, the state could use those dollars instead as seed capital for a new depository institution that could use the rules of banking to leverage a much larger amount relative to the state’s initial investment.

After passing the legislation to privatize the two revolving loan funds, the state issued a request for proposals to take over the $15 million in assets. Henderson says there were two main requirements for the RFP.

First, proposals had to use the funds to establish a federally certified CDFI — a community development financial institution, meaning it would be one of around 1,200 such organizations across the country that each have a primary mission of serving low and moderate income communities.

Second, the new institution had to be a depository institution — a credit union or a bank of some kind, in order to achieve the desired leverage of the state’s initial investment.

The winner of the RFP, which very well could have been a consortium of private equity funds or other Wall Street investors, instead was a consortium of three nonprofits — the Kentucky-based Federation of Appalachian Housing Enterprises, Virginia Community Development Corporation, and Community Housing Partners.

As a board member at Community Housing Partners at the time, Henderson provided some early input into the winning proposal. She had just retired from commercial banking, where she specialized in community development lending and investment.

“We opened our doors in 2006 to start lending as a nonprofit loan fund,” says Henderson, who was recruited out of retirement to helm the nonprofit. “That’s also when we started investigating what kind of regulated [depository] institution we would establish.”

Establishing a credit union was ruled out early. Henderson says the Virginia Bankers Association pushed for “competitive fairness” — the phrase banking industry lobbyists often use when arguing that credit unions should pay taxes.

The consortium also decided it would not actively compete for consumer and business checking accounts. Instead, the new bank would rely on wholesale banking — raising deposits mostly from other banks as well as larger institutions like corporations, foundations or church groups that need to leave large amounts in savings or money market accounts, often exceeding the federal deposit insurance limit of $250,000 per depositor. The bank doesn’t have an extensive network of branches to take deposits — it has just two offices across the entire state, and is just now thinking about opening up a third.

As a former commercial banker herself, Henderson knew it would be relatively easy for a new wholesale bank with CDFI certification to raise deposits from other banks. Both large and small banks can satisfy some of their own Community Reinvestment Act obligations by making deposits into other banks or credit unions that carry CDFI certification. A majority of Virginia Community Capital’s deposits today come from other banks.

As with any prospective bank, the consortium still needed approval for its business plan from state banking regulators and the FDIC. But rather than its wholesale banking model for deposits or its target lending market of affordable housing, community development and small business, the biggest hitch according to Henderson was the fact that Virginia Community Capital, a nonprofit, would become a bank holding company.

“Nobody knew how many nonprofit holding companies there were in the nation, but there were not many,” says Henderson. “It took the regulators a little while to review the concept and our proposed operating model.”

The few nonprofit bank holding companies that do exist all have idiosyncratic back stories.

There’s Beneficial State Foundation, a public foundation founded by a wealthy philanthropic couple, which owns Oakland-based Beneficial State Bank.

There’s City First Enterprises, which will remain a nonprofit bank holding company after City First Bank merges with Broadway Federal Savings Bank, becoming a single, publicly-traded institution.

And there’s Otto Bremer Trust, currently embroiled in a contentious struggle with Bremer Bank, the bank it owns but doesn’t technically control, as bank founder Otto Bremer willed the voting shares of the bank to its employees.

There’s other unusual bank ownership structures out there. Amalgamated Bank was majority union-owned until it went public in 2018. National Cooperative Bank is owned by the co-op businesses and housing co-ops that borrow from the bank. National Cooperative Bank also got its seed capital from government — the federal government in its case.

And there’s one remaining example of a state-owned bank, the Bank of North Dakota, established in 1919 with $2 million in funding from the state. Today it’s a $7 billion bank, with a primary mission of economic development, making loans to farmers and businesses as well as local governments across the state. It also has a large student loan portfolio.

But the Bank of North Dakota doesn’t carry FDIC insurance — instead, the state government guarantees the bank’s deposits, which also come almost entirely from the state government, since the state is required by law to deposit all its revenues into the Bank of North Dakota. A state guaranteeing its own bank holding its own deposits is a unique situation that even the most ardent supporters of state- or city-owned banks agree would be hard if not impossible to replicate.

Henderson says Virginia did briefly consider creating a state-owned bank back in 2006, but opted to go the privatization route instead for the two revolving loan funds. “The regulators were happy with that decision,” says Henderson.

The FDIC finally approved Virginia Community Capital’s application for deposit insurance in July 2008. The nonprofit established a for-profit subsidiary to serve as a banking entity, and used its stockpile of state cash to make a startup investment of $7 million of common shares in the banking subsidiary.

Under the rules of banking in the United States, a $7 million shareholder investment into a bank translates into the ability to make up to $77 million in loans and other investments. That’s a huge jump in available financing from the state’s initial investment of $15 million.

It was just in time for Bowser. Southside Community Development and Housing Corporation had just come into ownership of a stalled subdivision consisting of more than 30 foreclosed and vacant lots in Chesterfield County, south of Richmond. After the big commercial banks pulled away their construction lines of credit, Virginia Community Capital was there to fill the gap. While it took more than four years, the nonprofit did eventually build and sell all the homes to first-time homeowners, with grants available to reduce down payments to as little as $1,000.

“If it was not for [Virginia Community Capital], we would probably not be in existence doing development today,” says Bowser.

Henderson says the bank is increasingly finding itself on the very earliest stages of a project, making loans for acquisition or pre-development, which in turn make it possible for developers to apply for other resources, including tax credits or grants that can take years to secure. It’s also been making construction loans to nonprofit developers building homes on properties owned by community land trusts, entities created to ensure permanent affordability for the homes on their land.

The biggest challenge for her bank, Henderson says, isn’t managing risk or finding projects or businesses that need capital. Managing risk is a big job, but it’s what bankers spend most of their working hours doing. And there are always projects and businesses that need capital. The bank’s biggest challenge according to Henderson, is continuing to grow its equity — its shareholder capital plus any retained earnings and additional grant support that the bank has set aside over the years.

Equity is the main limit on bank lending — as a cushion against potential losses, regulators require banks to maintain around $1 in equity for every $11 in loans and other investments they make. But equity is much harder to raise than deposits, particularly if you’re not promising perpetually increasing stock prices for investors.

Virginia Community Capital’s bank currently has $24 million in equity. There’s the initial $7 million from the state — which has never extended additional equity funding to the bank — plus $5.6 million in retained earnings. The nonprofit holding company has provided $6.6 million more in equity over the past 10 years. But the needs have been greater than what those three sources represent. So a few years ago, the bank started selling non-voting shares to outside investors — preserving the mission-oriented nature of the bank. It’s raised close to $5 million from outside investors so far, making it possible for the bank to grow to its current $246 million in loans and other investments.

But outside investors have been slower to come by than Henderson would like.

“We can find the deposits if we can raise the equity,” says Henderson.