Putting Depositors First
African-American and other minority-owned banks are a bright spot in the collapse of the subprime mortgage market that has upended Wall Street and threw the global financial and banking industries into turmoil.
The chance to earn quick, easy money in a game that bundled inherently bad loans and passed them along to third-party mortgage brokers proved too seductive to ignore for some of the country’s biggest and most venerable financial institutions — the likes of Bear Stearns Cos. Inc., Lehman Brothers, Wachovia Corp. and Washington Mutual Inc. Like high rollers at a poker table, they ponied up with other people’s money and paid to play.
At minority-owned community banks, however, CEOs and loan officers alike played it safe and held their depositors’ money close to the vest.
“We were able to say ‘no’ when things didn’t make sense,” explains Louis E. Prezeau, president and chief executive officer of City National Bank in Newark, N.J., the only Black owned-and-operated commercial bank in the state. “Sometimes the little guys, having less resources, know how to protect our resources more. You try to do more with less, but being wise not to lose it all.”
At the time, such conservatism seemed unsexy, even boring, to some. But it’s hard to play high-stakes poker with the life savings of elderly grandmothers and with the tithes and contributions from the churches that these banks serve. Today, this type of level-headedness makes “boring” the new “sexy.”
“There is a mass exodus from the major banks from providing credit to everyone, and this creates an area of opportunity for community-owned banks,” explains James H. Bason, senior vice president and chief lending officer at New York City’s Carver Federal Savings Bank, the country’s largest Black-owned bank. “We’ve seen increased loan volume that we wouldn’t normally see, especially in the residential, construction and commercial categories.”
Named after Black inventor and scientist George Washington Carver, the bank has been a mainstay in Harlem since 1948. It went public in 1994 as Carver Bancorp Inc. (Nasdaq: CARV) and as of June had $788.7 million in total assets and $658.3 million in total loans receivable. The Federal Deposit Insurance Corp. (FDIC), which guarantees the safety of checking and savings deposits in member banks, says that as of June there are 218 minority depository institutions (35 of them Black owned or operated and 39 Hispanic-owned or operated) in the United States with total assets of $205 million.
Avoiding the subprime market feeding frenzy, however, did not make community-based banks immune to the effects of the depressed real estate market overall. Some of their loans may not be repaid, for example.
“Community banks are facing the same problems like all the other banks, so they are in recessionary mode,” explains John Hall, senior vice president of public relations at American Bankers Association, a trade association in Washington, D.C. “But it’s a riskier time, so these banks are being appropriately cautious about making new loans.”
Prezeau says City National booked $10 million in loans in the last quarter, but the bank is doing more due diligence when reviewing a loan application than they may have in the past. Once loans are approved, the bank proactively reaches out to those holding the loans to make sure they are doing well and can meet their repayment obligations. “We don’t want to wait until they get into trouble. If someone loses their job, we work with them; that’s part of being a good bank,” Prezeau says.
For as many banks that are holding their own, there is probably an equal number or more that have to take drastic measures to stay afloat. In October, Popular Inc., the parent company of Banco Popular, the largest Hispanic-owned bank in the United States, reported a net loss of $668.5 million in the third quarter of this year.
That forced it to sell assets in its North American operations, trimming its U.S. work force by nearly 600 employees. Despite those moves, the bank assures its depositors that its services will not be compromised.
“We are taking a disciplined strategic approach to ensure the strength of our company and its U.S.
operations. The bank is focused on a seamless execution of any branch decisions,” says Juan Carlos Cruz, vice president of public relations and media at Banco Popular North America’s headquarters in Rosemont, Ill. “Customers are able to get loans and we remain focused on offering a superior customer experience, a broad suite of products, responsible and able lending practices, and strong distribution channels. We remain committed to serving the needs of our retail and business customers.”
How long that commitment lasts remains to be seen, as both domestic and overseas suitors are courting the bank.
In September, the U.S. Congress passed the Emergency Economic Stabilization Act that clears the way for what essentially is a $700 billion bailout of the financial industry. One provision of the bill increases the FDIC’s deposit insurance coverage from $100,000 to $250,000, a move, says Susan Ifill, Carver’s senior vice president and chief of retail, that gives small, community-based banks a leg up against their larger competitors.
“Large banks enjoy an advantage in that consumers sometimes believe ‘large is safe.’ That bias is diminished when we can show that community banks offer increased protection well beyond a consumer’s balance,” explains Ifill.
“For example, the average consumer in the communities we serve does not maintain a seven-figure balance, so when we can provide insurance in excess of the money they have spent a lifetime saving that gives them comfort.” Bank managers at the nine Carver branches in Manhattan, Brooklyn and Queens regularly conduct community outreach programs at churches and senior-citizen centers in their service areas to assure customers that their money is safe, Ifill says.
Born during the days of segregation when Blacks were not serviced by white-owned banks, minority-owned banks have made a niche in their personalized, “look-you-in-eye” style of banking.
“Community banks are valued by their customers because customers know their loan officer’s name and go to the same churches as the banking staff,” explains LaJuan Williams-Dickerson, public affairs specialist at the FDIC. “Customers at community banks have been [key to] their survival and are connected on a different level than at a larger institution.”
Minority-owned banks are accustomed to operating lean in order to remain strong and some of them are poised for growth in 2009. City National, for example, is well capitalized, with more than $450 million in consolidated assets and more than $220 million in loans. The bank continues to grow, with two branches scheduled to open in 2009, bringing its total number of branches to 12.
While the downturn in the market will continue through mid-2009, “the good news is that community banks are all very well capitalized because they are required by regulators to have a ‘rainy day’ fund of reserves,” says Hall of the American Bankers Association.
“That’s how we’re different from financial institutions and mortgage brokers because they are not required to have all that capital, which is probably why these financial companies are getting bought by banks. The banking industry has a much more harsh form of regulation, but our business model tends to be the most solid.”
Ifill agrees. “The heart of a community bank that makes us different from everybody else is our emphasis on personal banking,” she says. “We are here. We are sound. Come do business.”