BBVA Compass becomes largest investor in loan fund for small businesses in Appalachian Alabama
BBVA Compass has closed a $5 million equity investment in Pathway Lending, becoming the largest investor in Alabama’s effort to build up small businesses in the state’s Appalachian region. Pathway Lending, a Community Development Financial Institution certified by the U.S. Department of Treasury, will operate the state’s new loan fund for small businesses in the 37 counties of Appalachian Alabama.
The number of small businesses in Appalachian Alabama that received loans plummeted in the years following the Great Recession, with 15.8 percent getting loans in 2010 compared to 50.3 percent in the year immediately preceding the financial crisis. The state’s loan fund, which it announced in August 2016, is designed to give entrepreneurs in Appalachian Alabama access to the capital they need to grow and create jobs. Pathway Lending contributed $1.3 million to establish the state’s loan fund, and said at the time that it planned to raise $3 million in private capital to further support the effort.
Smith: We’re going above and beyond with our investment in Pathway as a resounding show of support for its mission in Appalachian Alabama.
“We’re going above and beyond with our investment in Pathway as a resounding show of support for its mission in Appalachian Alabama,” said BBVA Compass East Region Executive Lee Smith. “We’re hoping to inspire other banks to get on board and help create opportunities for entrepreneurs to build jobs and brighter futures for the people in these 37 counties.”
Across the entire Appalachian Region, which spans 13 states, the lending rates to small businesses is nearly 20 percent below national rates. And that number is even lower in the 84 counties in Appalachia that are considered “distressed.” Lending levels to small businesses in these counties, two of which are in Alabama, were at less than 60 percent of the national rates.
Nearly two-thirds of Alabama’s population falls within the Appalachian region.
Gohl: These investments will create jobs, spur opportunities, and be an enormous economic asset in Appalachia.
“BBVA Compass and Pathway Lending have set an impressive benchmark for how CDFIs can bring new capital into Alabama and the rest of the Appalachian region,” said Earl Gohl, federal co-chairman of the Appalachian Regional Commission. “These investments will create jobs, spur opportunities, and be an enormous economic asset in Appalachia.”
Clint Gwin, president of Pathway Lending, said BBVA Compass' support — along with support from the state of Alabama through the Alabama Department of Economic and Community Development, the Appalachian Regional Commission and the Alabama Small Business Development Centers — is helping Pathway enlarge its mission.
“As a Community Development Financial Institution, we focus on entrepreneurs who would not otherwise qualify for traditional bank loans,” Gwin said. “Thanks to the capital provided by BBVA Compass and our other partners, we are excited to expand our lending focus to small businesses in Alabama so they can expand and create jobs.”
Investment to support job creation
Pathway Lending plans to originate $1.75 million in loans, supporting 50 new businesses and creating at least 105 new jobs during the first three years of the fund’s operations.
Pathway Lending’s CDFI status gives the organization access to federal grants and resources. CDFIs are private financial institutions whose purpose is to deliver responsible, affordable lending to low-income and underserved communities. They often lend to borrowers that may not meet a traditional financial institution’s underwriting criteria. There are more than 1,000 CDFIs nationwide today, and in 2016, they originated more than $3.62 billion in loans and investments; financed 33,500 units of affordable housing; and made loans to more than 11,300 small businesses.
An equity equivalent investment, or EQ2 as it’s known, is a low-interest loan to a community development financial institution. Since it has certain characteristics of an equity investment — it’s deeply subordinated, auto-renewable, with rolling terms — it is considered an investment rather than a loan. Banks find the EQ2 investment attractive in part because it is counted favorably during the federal Community Reinvestment Act exam, which measures how well banks are meeting their communities’ credit needs.
BBVA Compass announced in late 2014 that it was committing $11 billion toward supporting low- to moderate-income individuals and communities, and would channel more than $100 million in capital to CDFIs over the next five years. Since then, it has closed 24 transactions totaling nearly $54 million with various CDFIs, including 21 EQ2 investments and three stock purchases. Three of those EQ2s, for a total volume of $8.5 million, are impacting Alabama, with the investment in Pathway Lending being the largest.