Bank of Boston Corp. has set up a community development company to make equity investments and loans to small businesses in low- and moderate- income areas.
BankBoston Development Co., which was formed last week, will invest in companies with high growth potential and sales of more than $500,000. It will also make loans of $5,000 to $5 million with variable repayment terms.
Bank of Boston is one of a growing number of banks seeking to bring small-business efforts to bear on community reinvestment grades.
The $62 billion-asset bank estimates that it will commit $100 million to target communities in New England and Florida over the next four years.
"We have a fantastic combination of doing good for the shareholders of BankBoston and the communities that we serve," said Chad Gifford, Bank of Boston's chief executive officer.
Bank of Boston is hoping that its innovative small-business efforts will gain it Community Reinvestment Act credit under revised regulations that take full effect in July.
Other banks have invested in micro-loan funds or bought small-business loans made by nonbank lenders in low- or moderate-income areas. A few banks have bought unsecured debt issued by venture-capital firms that invest in minority-owned businesses.
Bank of Boston is taking advantage of a change in regulations that allows banks to use community development corporations to make equity investments that otherwise would be prohibited by banking laws.
"By tinkering with these regulations, we discovered that we could encourage banks to make more investments in urban areas," said Eugene A. Ludwig, comptroller of the currency, at a press conference about Bank of Boston's effort.
Traditionally, bank community development companies have not made equity investments except in companies that develop affordable housing.
Grady Hedgespeth, president of BankBoston Development, said profits from developing such housing will offset the risks of making equity investments and loans.
Mr. Hedgespeth said the investments in low-income areas will also shore up the value of the banks' branches in urban areas, which increased in number with the merger between Bank of Boston and BayBanks.
"It's crucial to our overall business strategy," he said.
Mr. Hedgespeth said he could foresee his unit investing in a business that owns a fast-food franchise and eventually selling its stake to the franchise manager.
"We like to think of our equity investments as a marriage where we fully intend to get divorced," Mr. Hedgespeth said.
The development company will provide management training, help small- business owners network, and pair them up with "mentors" at bigger businesses.
BankBoston Development's first transaction was a $6.5 million investment in Long Bay Management Co., a minority-owned real estate development company.
"BankBoston will make a profit on this deal," said Ken Gusscott, owner of Long Bay Management.