Portsmouth City Council is one of the eight founding investors of Hampshire Community Bank and agreed last September to grant it a Â£ 10million loan.
The fledgling financial institution is currently submitting banking license applications to regulators – and hopes to offer an alternative to the UK’s Big Five banks.
The five-year Â£ 10million loan – needed for HCB to prove it has the cash to lend – comes after city council agreed to invest Â£ 5million in the project in 2014 to help to establish the bank.
Those who backed the project in 2014 – and agreed to pay a total of Â£ 8million – also include Eastleigh City Council, Winchester City Council, University of Portsmouth and University of Southampton .
It is hoped that the bank will lend to small and medium-sized businesses with “close ties” to Hampshire.
Some businesses have already received loans because the bank does not need a license to lend to businesses.
City councilors agreed in September, when they signed the money, that they wanted a six-month progress report from the bank bosses.
But nine months on the governance committee – which was supposed to receive the report – received no such report.
Vice-president Conservative adviser Simon Bosher said it was frustrating that the board leadership failed to ensure this happened.
He said: âWe’re definitely going to put it under the microscope because we’re talking about tens of millions of pounds of taxpayer dollars they’re playing with.
âThey run the risk of becoming a white elephant if they don’t follow the governance.
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âIt’s going to be quite difficult with the pressure put on the board by the Covid pandemic. We have to watch every penny and clearly the administration is not doing it.
The board said the semi-annual report was intended to reflect any lending activity after the loan was agreed. A spokeswoman said “there is not yet six months of loan activity” on the loan – so there is no report.
Professor Richard Werner, chairman of the bank’s board, told The News: âAlthough the funding was approved by the CCP in September, unfortunately no funds have been released so far.
âWe understand that any report relates to the use of funds loaned to the community bank and is intended to ensure that the use of funds is in accordance with CCP requirements.
âSince nothing has been loaned to the community bank by PCC, there can be no report yet.
“Needless to say, we are anxiously awaiting the disbursement of funds.”
The bank is currently submitting its license offers to the Prudential Regulation Authority and the Financial Conduct Authority.
Portsmouth City Council is the main shareholder
Portsmouth’s Â£ 5million capital investment means the board is a founding investor and shareholder, of which CFO Chris Ward sits on the board.
It is expected that 50 percent of the bank’s profits will be allocated to a grants board and split between grants, donations and charitable disbursements.
With the board’s investment, that means it has five of the 13 votes on the grants board.
The remaining 50 percent of distributed bank profits will be paid out to shareholders as a dividend. The board owns 62.5% of the shareholding – so it would benefit.
Portsmouth council said its Â£ 10million loan to the bank was on commercial terms so it is getting a better return than what is otherwise available through other investments.
About 50% of the loans will go to businesses with a PO zip code, according to a city council statement.
The bank’s work is expected to contribute at least Â£ 20million directly to GDP and bring in Â£ 6.35million in local and state taxes, according to a council report.
Asked about the board’s confidence not to waste its money on the program, a statement said: âThroughout the banking authorization process, all shareholders have been given assurance regarding the prospects of obtaining a banking authorization. and the soundness of the bank’s business plan and operations policies by BDO LLP banking experts.
“Prior to the release of any capital investment tranche by shareholders, a report is required by BDO, which satisfactorily concludes that the bank is capable of obtaining authorization.”
A spokesperson for the bank told The News: “Currently, all of our staff are engaged and working hard to bring the request to regulators.”
Customers are already using cash
Testimonials on the bank’s website tell how it already supports its customers.
The bank’s loan portfolio was set up in 2016 with a grant from the Regional Growth Fund of Â£ 950,000 and was administered by the Local First Community Interest Company – with the Eastleigh board being responsible.
As of March 2017, it had already granted Â£ 1.145million in loans to 13 companies, mainly Winchester and Eastleigh.
All but one debtor have paid. The one that did not go bankrupt, causing a loss of Â£ 46,000 to Local First CIC, which administered the loans.
In February 2019, the Eastleigh board transferred its green growth loans to HCB.
About 115 jobs were created through the use of the loaned funds, with 156 jobs retained.
Among the companies to benefit from the loan is Turbulent Simulations, based at Langstone Technology Park in Havant.
The company’s customers include the Royal Navy, Lockheed Martin, Microsoft, BP and Royal Caribbean International.
Director Trevor Linn said when he needed a loan in 2016, “the community bank was the only bank at the time that would support us to stay in business.”
In his testimony, he added, âSince our first loan, we have expanded and paid off the first loan now.
âTurbulent has grown the site and expanded into new markets by designing and visualizing systems for reading sensors and has a range of clients from Lockheed Martin, BP, Royal Caribbean to name a few.
âCovid-19 has hit our market hard and Hampshire Bank has been excellent in helping our business. They contacted us to see if we wanted to pay interest just to keep our cash flow in good shape. It has been a blessing.
“Now we look forward toâ¦ when we all hope the market will come back and we’re ready to move forward again.”
July 2014: Portsmouth law firm accepts Â£ 5million investment
February 2016: Investors join HCB board of directors.
December 2018: First submission to regulators Prudential Regulation Authority and Financial Conduct Authority.
April 2019: feedback meeting with the PRA and the FCA
July 2019: Another application to regulators
August 2019: Second feedback meeting with regulators
April 2020: Submission to assess the capital and liquidity adequacy of the bank.
August 2020: Completion of the âchallenge phaseâ for regulators
Paid at Â£ 1,000 per share
5,000 – Portsmouth City Council
500 – Eastleigh Borough Council
250 – Winchester City Council
500 – Test Valley Borough Council
200 – University of Portsmouth
100 – University of Winchester
400 – University of Southampton
100 – University of Southampton Solent
950 – First local community interest company
Why is a community bank needed?
Hampshire Community Bank Chairman Professor Richard Werner is an economist and supporter of small banks.
His research has shown that small banks can boost countries’ economies.
He told The News: âSince the 2008 crisis it has become clear that UK small and medium-sized businesses are not well served by UK banks.
âMy recent research has empirically demonstrated the principle that this is because UK banks are too big.
âBig banks want to lend big amounts to big companies. Only small banks lend to small businesses.
âAt the same time, small businesses are essential for job creation and economic growth: they account for two-thirds of all jobs.
âThis explains why countries with many small banks have very strong economies, namely the United States, Germany and China, each with several thousand banks, most of which are very small local community banks.
âOn the other hand, countries with a small number of large banks dominating the banking system, such as the UK, where the Big Five account for almost 90% of all deposits, have weaker economies, higher exports. weak and less job creation, because such big banks are not interested in lending to small businesses – it makes no economic sense to them.
He added, âSo to boost jobs and economic growth and create prosperity, we need to establish local community banks, which have been at the heart of economic success in the United States, Germany and China. When the UK had strong economic growth in the 19th century there were over a thousand banks! Today it is down to 350, almost half of which are international city banks , with a tiny domestic market share Essentially five banks dominate the domestic market.