Welcome everyone. We have two presenters: Jeremy Nowack, Tom Munoz, and two respondents: Harry Pestine and Fred Mendez.

We're hoping to hear stories from different perspecitves and how each of these organizations are rooted geographically. We want to hear about what has allowed them to stay successful and how they were able to go to scale. They have become a big niche players and we want to learn more about them.

This morning was such high quality conversation and I will try to bring that down a bit. (laughter)

We've got a wealth of opportunity here. We see ourselves providing three things: capital, information and innovation. We currently manage about $250m in capital. About $66M in loans.

Captial for us comes from a lot of different investors, individuals, religious and philanthropical organizations.

Knowledge has to do with very high quality information and research.

Innovation has to do with putting together a huge supermarket to linking private equaty and distressed urban markets.

In the first years of our growth there was something in the DNA that was an important platform which was more significant than our processes. We assumed we'd be perfmanent. We weren't a program or an initiative, but something that was much more permanent.

Even though we were quite small, we assumed that the region was the marketplace for us. It was a piece of geogrpahy that we could have relationship to. It was the smallest economic unit. It was the relationship between what was scaleable and where we could have some intervention. We believed in investor dilution. We wanted to have a flexible but disciplined structure.

The 10 years afterward I would characterize us as being a well-run nonprofit. We went to a just-in-time structure. We learned how to internalize the lessons of our major mistakes. We also learned how to listen to the market. We had an enormous amount of liquidity bcause we didn't understand the market, or maybe we had the wrong customers. We also learned how to attract and acquire talent.

We're now in the process of restructuring a new kind of business model. Besides being clear about our products, we learned that the value of information is the most important thing we have. Our competitive advantage is how to utilize and leverage that.

We have gradually learned how to move backstage, which is infrastructure. When you think about innovation, it's really about business processes. These are the enabling and support functions but when you transform them into front stage actions, they take on different aspects. We are able to think about geographical expansion.

When I think about sustainability, I think about the issues on this slide. You need to have valuable products. You have to have a pricing model that understands risk and transaction costs. There is nothing wrong with subsidy as long as you know how to use it. In our organization, internal subsidy is better than external subsidy.

You have to have a balance sheet for growth. You need to have enough depth to cover the cost of innovation. We need to ask the question if we're there to be stimulated or to stimulate other players. R&D is important but it's not enough for us. You need to get value out of what you do. The economic engine has got to be some place in the organization.

Let me talk about information. We were good real estate lenders, but we understood only borrowers and transactions. We weren't able to make money because we didn't understand where the market was going. Now we have these analysis tools that allows us to understand where these markets are going and why we want to be in certain types of markets. This allows us to drive our direction as well as public policies. We were able to use information to move from an R&D organization to making a difference.

Here is the transformation from back stage to front stage and that's through automation. We finally looked at process engineering for our systems. Here we have some of the best information and yet we just pushed it around the organization without knowing how to access it from the various parts and often had to reinvent it.

Here is our geogrphical expansion ideas. This was driven by the relationships. We try to understand the links between wealth and poverty. We worked on the transition zones. We started play a different kind of role in some areas. Given what we were good at, if we wanted to grow, we had to play the Amtrak line.

We also became smarter around capital market access.

What TRF needs to do is to gcreate the integrity of a portfolio but doesn't assume it will make significant change through this portfolio. It needs to be leveraged into the policy sphere. It is the implementation of the portfolio and social change is the important relatioship. How we restructure a particular product is about systems change and public policy.

We want to build a better business model. People were used to coming to a local bank. They were not used to going to a huge corporate institution. We wanted to provide the experience of knowing your personal bankers.

Here is a snapshot of who we are.It's impressive to me because I've seen it grow from the ground up. These are some significant figures for us in our development. We've had 10 mergers and acquisitions. As a result we have about 40 branches and now we're building more branches as well as buying community banks around the county.

We wanted to keep the feel of the community bank. We figured that is the asset that made these successful.

We are customer-focused and we strived to keep the personality of the branches. We have many different languages in all our banks as well as our phone service.

We have identified the "bank within the bank" and have focused on the different neighborhoods where our banks are.

We continually make investments for community development. When we consolidated our different departments and moved some of them out of the bank. The most important for us was the retail area. I run the community lending division. We try to make this process as seamless as possible as well as quick turnaround.

With the efficiencies we've achieved, we can offer other community nonproftis some support. With ACCION, we service and house their loans.

We have to invest in our staff and bring them up to a high level. You want people to be able to make decisions and appear capable right at the branch. You have to have the right products.

With our centralized underwriting and processing it is under retail control. We're not getting lost in corporate control. We've expanded our deposit role.

We have challenges that we try to address.

We're hearing some positive things here. We heard about the infrastructure of outstanding operations.We have a CDFI who is growing beautifully and a CDFI-like institution that is regulated and growing in their region.

Trying to identify the market between the lower and higher incomes and change your offerings to serve the constituency. It is possible to work with the retail community in order to serve a greater population. You will serve mixed income development.

We heard about DNA andlocal champions: These are very important. The investors in this are critical to the success of CDFI. If regulations did not prohibit it, I'm sure that the MB would be considered a CDFI.

My head kind of hurts from this information and trying to put it all together. I'm more at the 30,000 foot level. I've divided this up into something that Jeremy would call valuable products.

THe issue is expansion in terms of prodcuts as well as geogrphy. Becasue of the last 5-6 years, we can look at what we do best which is to blame others.

Silicon Valley Bank is really weird or innovative. I wanted to see how the CRA would fit them. They were a great institution that built their charter aroudn the CRA while violating almost every rule in it.

We were able to offer loans to people who did not fit the profile for successful lendees. We looked at the business model and what their plan was. We have no off the shelf products. If we introduce you to a venture capitalist who likes what you do, then we build a financial product that will fit what's needed.

In the CD field, i've noticed that product is driven more by need. It resembles more of a push model that pushes products into the community. It's an educational model which says that you need this. It's an arrogant model, which tells people what they need and then provide. If we're okay with that, then we could take this discussion in a different direction.

We want to really go toward a product pull model. Usually when you talk about market demand, you need to move beyond a simple need assessment.

In terms of the geogpraphic issues, we talk about it as if it as essential to general sufficient revenue to survive. I think that is questionable. You may need to see the long view. I'm sure Jeremy's board looks very different now than it did when it started. When you're thinking about expansion, you inherit leadership, but i'm sure there is filtering that happens.

The pain of change has to be less than the pain of the status quo. I don't know where we're at here in our evolution as an industry.

The issue of efficiency is my last oint. Where do we go as an organization in our plan for geogrphic expansion in the continiuum of financial offerings. We have to consider the appropriate business models for each situation. We have to hink about how good we are at achieving our goal. There is no effective measurement of knowing how successful nonprofits are in this arena.

Adding to this challenge is a funding community who has historically underfunded the research necessary for this work. Three year grants are not going to build a long term knowledge base or to take the risks that will allow us to make mistakes.

I saw a keynote speaker with 300 program officers as the audience. You fund a nonprofit, wait a year, topnotch people who are very passionate.. The customers like it. You ask them if it's what they need. not so much.

There's inadequate market research. There is inadequate underwriting for funding. WIth tough love, I want to offer that the blame goes to the CDIF and the funding community.

This issue of tough love towards our market research is key.

When i heard people talk about process re-engineering, people tend to go toward corporate banking. I didn't know the MB banking story. Do you see TRF using a relationship based model that allows underwriting?

It depends on the infrastructure. We cannot make our small busienss lenders as profitable as we want them to be. We don't have either the credit scoring pools that create that kind of efficiencies nor do cross-marketing options. We have to either develop these tools or come up with other options. We can restructure the way we do this.

There are some kinds of investing and lending that are not commoditized. We focused on areas that have both radical differences in economic ability. From wealth to extreme poverty. I'm sure there is someone who knows how to do this better. Maybe we can partner with them. We go towards what we know what we're good at.

Do you think TFIs have a higher standard because we have missions?

On one level, yes, but in a superficial way.

Are you creating any products that are different from traditional bank products? Are you creating products that possibly they wouldn't understand?

It's some of both, but more of the second kind. There's not that many fancy things you can do with lending options. It's not so much the product as it is the understanding the inflection points of the market and understanding the customers in that market.

What happens to the CDC community related to what the CDFI's are doing? Where is the next level for the CDC's?

The term of CDFI is interpretable and is now different for most people than what it was first defined as. I think now CDC's would be considered as a CDFI.

When CDC's are too narrowly focused and need to much subsidizing, they are not sustainable. If my venture depended on CDC's I would be out of business. Transformations have happened in that world but large parts of the philanthropic community have not figured out how this allocation of resources is not sustainable.

What's the combination of internal general funding as opposed to going out to get funding?

We've had a large degree of capitalization in the smaller banks. We became a public company on NASDAQ. THat's the weakest part of the TRF. It doesn't generate enough money to make its own growth. It relies largely on things like the CDFI fund. We have enough performance that some portion of the state's budget will end up on my balance sheet. People assumed we would be there. No one asks if the Philadelphia orchestra is sustainable. THey just assume it will be there. The attitutde of permanence becomes civic. It is much easier to have stable debt as opposed to stable funding.

As a nonprofit there is a conundrum that there is no place to go. We've gotten to the point where this structure doesn't work for us. What are the factors that will be part of our decision to go forward. We would turn down money that didn't make sense for us, which is a very powerful place for us. I imagine TRF could be in this position.

We found the right customers. Our structure and captial organization was driven by our customers. Our growth is related to the ambition of our customers. Part of the DNA has to be disciplined and flexible at the same time.

Our two largest mistakes have to do with financial management and not understanding interest rates. This was a major mistake. Also from an organizational process, our big mistake is that we fell in love with our entrepreneur. We became lender and builder. At some point, I was writing memos to myself!

This breakout session is really going to focus on partnerships. We'll hear from panelists concerning their missions, goals, motivations, and specific roles in their partnerships. A key question that will hopefully be answered by our panel is how differences were handled in their respective partnerships.

It's a really pleasure and treat to have both experience from the non-profit realm, as well as having someone from the for-profit realm (H&R Block).

Our purpose here today is to tell you what we have done in our partnership.

First, we'll discuss our respective mission statements. Like most mission statements, they are very difficult to write.

This was very easy to visualize when looking at higher-income clients. We are still trying to figure out what this means when it comes to lower-income families. What are some of the services that can be taken advantage of that H&R Block (HRB) has implemented all over the country? It's simply about client retention. Are there services at the tax desk that can be provided?

We realized that we may be cooperating as well as competing in our relationship.

Let's look at a little information about HRB. We serve more than 20M clients annually. More than half of those clients have an AGI of less than $30,000/year. We have more than 11,000 retail outlets. We have a very large training issue - each year we hire 80,000 tax professionals, ramp them up, then tear it all down only to re-do it the following year.

Now some information about the Community Action Project (CAP). It is the Tulsa area's designated community action agency. We served more than 20,000 clients in 2004. We also do affordable housing, and affordable housing literacy education.

As partners, we went out to the community to find families that might meet the eligibility requirements to participate in the project. In some of the research that we did after the first year, we wanted to find out what people thought about the fact that CAP was doing this, and that HRB simply helped.

The screening tool that we used was named "BESO" - Benefits Eligibilty Screening for Oklahomans. It is a rules-driven, interactive inveriew tool. It determines likely eligibility for about 20 social services programs, and spits out an electronic pdf application for food stamps to DHS. The tool is in the very early stages of development. It's a stand-alone automated interview. It does not link to anything else. We left it simple like this for now, because sometimes we get ahead of ourselves, and leap too far ahead. So far the tool is functional, but what we have learned from our experiments is that it there's a lot we need to do.

Complimentary goals doesn't always me "the same goals." HRB wants to opitmize completeion of tax returens during limited timeframes. HRB wants to introduce embedded services in the tax-prep process, and retain more clients.

CAP wants to offer eligibility screening services to as many clients as possible. CAP wants to maximize completion and submission of food stamp applications, and serve as many clients as possible.

We also have some complimentary objectives. Some things that we wanted to find out: To what extent is a tax professional at HRB credible in delivering this service? Are tax professionals willing to do this kind of work? What kind of value will the client get out of this? Will our shareholders value this? If this is successful, can we test scalability with a non-profit partner?

CAP wanted to informally compare alternateive distribution channels - free/fee. We wanted to test deployment of the re-branded BESO application in a non-CAP site. We also wanted to test the ability to partner with a perceived "compeitior" and for-profit firm.

We found that in some cases, for our clients, the offer came from "out of the blue." We need to do some more work on what the value proposition is. We provide financial and tax information to our clients, but that does not seem to be completely what clients want. A commonly-heard desire is taking away the stress and confusion of tax preparation.

There are a few key partnership concepts that we have discovered. Openness, removing stereotypes, finding commonalities, and acknowledging differences. Both of our organizations want to provide wonderful customer-service experiences. As an additional note, CAP was interested in staying open as many hours as possible, in order to serve as many clients as possible. We didn't have to worry about making as much money as possible in a given time frame. We built flexibility into the partnership, because you never know what is really going to happen, and both parties need space in their structures to accomodate any flexibility that needs to happen down the road.

HRB rolls out new products every single year. They have the strutcures and business processes. For CAP, it is much more difficult. We only rolled out our surveys to 4 of our sites, not all 12. There are processes and structures we need to achieve scale.

You may be wondering how we came to this partenership. CAP and HRB already had an existing relationship. There are also a number of HRB retail offices located in Tulsa, mostly tax preparation sites.

John Herrera, Latino Communicty Credit Union

Thank you to everyone who has helped us over the last 5 years.

The LCCU was created with the help of 4 organizations. (NC State Employees' Credit Union) It became a hub for the development of Latino credit institutions. There are some for-profit credit unions.

NC State Employees' Credit Union brings everything we need. They are the 2nd largest CU in the USA, with over $12 billion in asets, 1 million members, they own their own ATM network, they are old-fashioned, and have experience doing back-office support with other credit unions.

El Centro Hispano brings us the trust of the community. Self-Help Credit Union is very innovative, always testing new things. They focus in home and commercial loans. They help us with credibility in raising money.

The role of the North Carolina Minority support center is similar to NFCDCU in NC. They provide technical assistance, as well as access to capital and grants.

The Latino Community CU focuses on serving the lower-income, unbanked immigrant community. We currently have about 30,000 members, and we are growing at a rate of about 1000 members per month. We are a fully bilingual company with 39 employees from 15 different countries.

The most important element of success in our partnership is simply having fun. I can look at myself in the mirror everyday and smile. If we're not happy doing our job, you just have to get out. We are often doing more than just helping clients to save their money, we are saving lives. We have a common purpose, and strategic partners and alliances that help us achieve our goals.

Some lessons learned - internal capacity buliding, flexibility, financial educatin, project ownership, and communication amongst all of the partners. As far as communication goes, we don't always know if we understand each other, but we try to communicate as much as possible.

Jim Blaine, State Employees' Credit Union

What we saw this morning in Langdon's presentation is that your world is going to change. Subsidy is no longer a given. If you believe that it is, then you're dead. Even the democrats know that this is true. So sustainability becomes the issue. For the CDFIs - a subsidized financial institution is going to be an oxymoron.

Scale is counterintuitive to us. It's about doing one thing very, very, very well. Look at HRB. They have 11,000 branches because they know how to do taxes. Why is the hot dog man out there on the street corner? To sell hot dogs? No - he's there because he knows you need to eat. And he has an easy infrastrcture to manage. If you have a phone and a PC, you can do very well managing a financial institution. Take a look at ING: they offer a savings account at 3.25% interest. That's the best on the planet. And it's all electronic. Do not get into a business that does not help you in the long run. Credit cards and checking accounts are not sustainable businesses. Debit cards can be done, if it's all electronic. Branches are difficult - the meter is running all the time at a physical branch.

At Latino/SECU, we recognized some needs - immigrants, language barriers, culture barriers, documentation issues and distrust. There's a lot of things that we don't do, because we don't have the programming or implementation methods to do too many things.

There are 6 rules of sustainability - cheaper, better, quicker, simpler, control the point of sale (quality - why let someone get in the way of your business), and staying local.

Why did we partner? Because we believe that we can change the world. We find that the least educated and the poorest people don't have to live the way that they do. We may be fanatics, but we think that we can do it.

Jim very well clarified the focus that we need to have on customers. The needs are always evolving, and those needs must be recognized to provide financial stability to our customers. When we look at our customer base and our financial stability as it changes over time after using various products, we see that what we're doing is working.

People go through various financial stages. First there's a chronic borrowing stage, then a pay-off stage, then a saving stage, and finally an investing stage. How do you retain customers beyond the borrowing stage? By offering products in all ranges of the lifecycle of a customer. Some organizations can go way beyond the transactional stage to help their customers move from a borrowing stage to an investing stage.

In comparing how these types of partnerships are related (a community organization coupled with a mainstream corporation), what's in it for the mainstream corporation? Public relations? For sustainability, what is the economic motive? What we notice here is that in the mainstream corporation there is always a "champion." Are these projects pet projects? What happens if the champion leaves a corporation? Does the partnership dissolve? These are some issues to consider.

The 2nd s-curve from Langdon's presentation is where we are.

One of my questions is about the brand HRB. Is that sustainable? When I told people that HRB was going to be at this conference, people were surprised. CDFIs are good identifying corporations that can help create more partnerships, but none the size of HRB.

Douglas Hartung: At HRB, we offer a product that people demand: the Refund Application Loan. The questions was raised to us early on. We opened up our code to others so that we could find the best way to do this. We learned some interesting things about how to have an open dialogue with our clients. If there's enough congruity with what they want, it makes sense to us to offer a product that people demand.

Andrea Hughes: I first learned about RALs years ago. I was at first surprised when CAP decided to partner with HRB. The clients said over and over that they were treated professionally, they were well informed, and were able to make their own choices. On average last year, an RAL cost about $80.

There have been some notions that this could be a licensable product. We got a grant to train screeners, and see if it would work in a commercial environment.

We did not decide on compensation for the various roles in the partnership, so that we would leave room for flexibility in changing the tasks that accompany the various roles.

Jim Blaine: Our credit union pays all taxes that a bank pays, except for one: the profits tax. Credit unions are not subject to the federal profit tax.

There are 3 situations that you pay taxes. If you're a CDFI, you should not give up, even if you are taxed. As a credit union, we have capital that we retain. Most for-profit business are there to make money. They need to pay investors. Credit unions have the only free capital on the planet. You have an economic model that cannot be beat. But you have to manage it well. There is something about the purpose and spirit is why we do this. The next generation of Hispanics in NC aren't going to use us - hopefully they'll have even more options than what we are providing today.