Black Banks in Decline
/After more than a century of delivering financial resources to underserved communities, black-owned banks are struggling to remain relevant -- and solvent -- in an economic environment full of pitfalls.
Their traditional customer base -- lower and middle class blacks, small business owners and churches -- has been disproportionately affected by high unemployment, leaving customers with less money to deposit and, in turn, leaving many of these smaller financial institutions with less capital to reinvest in their communities. As customers have fallen on hard times or fallen behind in their loan repayments or mortgages, home foreclosures have become a nagging issue, hamstringing banks' portfolios with toxic loans. Meanwhile, many customers with big savings and healthy checking accounts opt for the flexibility of larger banks, which offer more branches and a wider variety of services.
"This minority bank community is really catching hell," said Michael Grant, the president of the National Banker's Association, an 84-year-old trade group that represents minority-owned banks. "They have survived everything, including world wars and Jim Crow, but this has been one of the most difficult periods of all."
Black banks have functioned mainly as "mission-based" institutions, born not long after slavery to help build black wealth. (The first African-American-owned and -operated bank was Capital Savings Bank in Washington, D.C., established in 1888. It spurred a boom in black businesses and offered blacks a resource they had been previously denied.) They are traditionally conservative, with close ties to local churches, families and businesses. When the community suffers, it's felt more acutely, with little wiggle room for mistakes.
"If the community is struggling financially, with unemployment rates as high as 20 to 25 percent in some places, what does that do to its overall financial health?" Grant asked. "If people don't have work or they are underemployed, if they are losing their jobs, it affects how much they can put into their bills or into their church, and the churches have the big loans and it affects their payments."
The number of black-owned banks across the nation is dwindling. In 1994, 54 such banks were identified by the FDIC; now there are just 28.
William Michael Cunningham, the CEO of Creative Investment Research, Inc., a Washington D.C.-based firm that specializes in minority banking, said that part of what has hurt these banks was their own business model. "Part of what happened was that they were kind of victimized by their own success, in the sense that the reason the Wells Fargos of the world started targeting the black community is because they finally woke up and discovered what these small black-owned banks had known forever: that there was money there," Cunningham said.
Even the largest black-owned banks are dwarfed by the major players in the financial industry. The vast majority of the black lending institutions are smaller community banks with as little as $20 million in assets, standing no real chance of competing, were it not for an extremely loyal customer base.
During the recent housing bubble, large corporate banks pushed into poor and working-class communities, nudging out smaller institutions, peddling subprime mortgages and predatory loans. “The question then becomes, 'Why didn't the black banks step in and do something?'” Cunningham said. "In part, because they couldn't. They just didn't have the resources that Wells Fargo, almost a trillion-dollar bank did. They just could not get it done. But still, that raises some questions about the viability of black banks."
“I think we have entered an era where it is comfortable for America to say there is no need for special consideration for institutions like this," said James Young, the president of Citizens Trust Bank in Atlanta. Not just banks, it's historically black colleges, it is a lot of other things that America feels comfortable in saying it no longer has relevance." He notes that red-lining and prejudice in the industry persist, keeping valuable credit and loan services from minority communities.
Too often black banks have had to remain conservative, which meant relying on long-established relationships that have kept them afloat over the years. But that risk-averse approach comes with a price, pinning the banks' well-being to that of their most vulnerable customers. Yet because financial instability is nothing new for many black communities, these banks have long practice at riding the economic tide, finding ways to be both nimble and steady for their base. While many banks are "struggling like hell" to stay open, others have done fairly well.
"Interestingly enough, some of our older institutions have responded better to the current economic downturn because the communities we serve have been in an economic downturn for years," said Bob James, the president of Carver State Bank in Savannah, Ga., and who is regarded as the longest-serving black bank president in the country.
Founded in 1927, Carver State Bank has relied on the stability of old customers and old loan relationships, assets in a portfolio connected to Savannah's rich past and to the bank's deep roots in its black community. James said the bank's portfolio just recently started to include more and more foreclosed properties and properties with depreciated values.
"Our managers ... understand how to function in this environment," he said. "There's a reason why major financial institutions have not done well in inner-city communities. For them it was not a top priority to service this community, so they had not developed the expertise in doing so."
Ebert C. Johnson, president of North Milwaukee State Bank, said that his bank is surviving by expanding its services, with an aggressive push to diversify its investments and partnerships. He adds that the intrinsic link between the unemployment rate and the livelihood of black banks is becoming more and more evident, and has played a role in securing federal funding.
"Part of what people look at is our business model: they don't understand it," he said, speaking of the regulators who can grant a bank access to federal funds. "I actually had a regulator say to me, 'We wouldn't want to put more money in an environment that, on its surface, is high unemployment,' because the prospects for turnover aren't that high, and that quite frankly, he was amazed that we are able to do what we are able to do."
North Milwaukee's experience with regulators is not uncommon. Experts in the black banking sector and bank presidents around the country have said the financial issues associated with the sluggish economy, including double-digit unemployment rates for blacks, are compounded by what they describe as skittish and unpredictable state and federal regulators, gatekeepers who experts say have stood stubbornly between the banks and federal assistance, including hundreds of billions of dollars set aside as part of the Troubled Asset Relief Program (TARP) and other programs designed to spur loans to small businesses.
"The larger banks created a lot of the problems, but they are not paying for it now," Grant said, noting that huge slices of the TARP pie were gobbled up by major financial institutions, while smaller banks have struggled to meet regulators' rigid standards. "I think it's an over-reaction to the lax regulations during the previous administration's reign. Because the regulations were so lax, Wall Street was running amok, and Wall Street execs caused the big bubble to burst. A lot of these smaller banks, that played such a small role in what happened, now are paying a very big price."
Young, the Citizens Trust Bank president, said his one of the few black-owned banks to receive TARP funding, and that smaller and minority-owned banks in general have been prevented from participating in alternative means of capital that could help them stay afloat, such as TARP, the Small Business Lending Fund and major infusions by private investors. But even for those institutions that have participated, many were weary of the restrictions that come with the low-interest federal loans. The terms allow the government to become a shareholder of the bank, to make board appointments and impose restrictions in how the bank pays dividends, to pay employees and to dictate how the bank disperses money and to whom. Regulators come and go as they please, bankers said, and some said they feel as if the regulators are "micromanaging" their accounts. Earning income has become increasingly difficult with high compliance costs, as regulators scrutinize transactions. But without the financial assistance, they are making fewer loans, resulting in less fee-based income.
Of the 28 banks identified as black-owned by the FDIC, only a few received any TARP funding: the largest being Carver Federal Savings Bank in New York with more than $715 million in total assets; followed by Citizens Trust, with a little more than $390 million; and Broadway Federal Bank in Los Angeles with about $470 million.
"I think like so many community banks in general, they have been subjected to more regulatory scrutiny," Young said. "The regulators, members of Congress, including the black caucus, seem not to care about the survival of these banks. But since their inception, they have been an avenue to the middle class for a lot of African Americans."
One of the fiercest advocates in Congress on behalf of black banks has been Rep. Maxine Waters (D-Calif.), whose advocacy has been called into question recently.
Waters is currently under investigation by the House ethics committee for her role in helping to secure $12 million in TARP funds for the Boston-based OneUnited Bank, one of the largest black banks in the country, and one in which her husband owned considerable stock. Waters is alleged to have set up meetings between bank leaders and Treasury Department officials. She has denied allegations of any wrongdoing and has said the meetings were set up on behalf of black-owned banks that are members of the National Bankers Association and not just OneUnited.
But Waters is not alone in her efforts to reinvigorate these banks. Warren Ballentine, the nationally syndicated radio talkshow host, has joined the National Bakers Association in a national campaign to encourage minorities to do business with minority banks.
"The People's Economic Movement," as it is called, will be launched on Aug. 28, 2011, to coincide with the unveiling of the Dr. Martin Luther King Jr. memorial statue in Washington.
"This recession has created not a moment in time but a movement in time. Community economic development will only come with an intelligent and targeted approach to managing money," Ballentine told the website Rollingout.com. "By investing their money in the minority banks in their own communities, consumers will begin to see how to make capitalism work in their favor."
Before his death, King had advocated for black dollars to be invested in black banks. "We've got to strengthen Black institutions. I call upon you to take your money out of the banks downtown and deposit your money in Tri-State Bank," he said during his "Mountaintop" speech in 1968. "Put your money there. You have six or seven black insurance companies here in the city of Memphis. Take out your insurance there. We want to have an 'insurance-in.'
"Now these are some practical things that we can do," he said. "We begin the process of building a greater economic base."
Grant, the head of the National Banker's Association, was sanguine, too. "Doom and gloom? No, and hell no," he said. "It's resolve'. it's 'we are more determined than ever to preserve these banks.' It's just the task of running these banks. The mission is still there, the determination is still there. It's just a very difficult climate to do business."
