The once-towering stature of the Black bank has diminished. After almost 125 years of serving the underserved, the Black banking community has been brought to a new low by a shrinking clientele, questions of relevance, competition from big banks and the fluctuating fortunes of its traditional client base—churches, small businesses and lower- and middle-income Blacks, who have borne the brunt of the economic recession.
Pictured: Michael Grant, President, National Bankers Association, Washington, DC
by Zenitha Prince
(NNPA)–The once-towering stature of the Black bank has diminished. After almost 125 years of serving the underserved, the Black banking community has been brought to a new low by a shrinking clientele, questions of relevance, competition from big banks and the fluctuating fortunes of its traditional client base—churches, small businesses and lower- and middle-income Blacks, who have borne the brunt of the economic recession.
“The state of Black banks is bleak,” said Paul O’Connor, founder of Angkor Strategic Advisors, a Chicago-based investment firm that works with Black banks, speaking about conditions within the minority banking community in that city.
In the past few years, several Black-owned banks, including the $2 billion-asset ShoreBank, one of the most active lenders on Chicago’s South Side, Covenant Bank and Highland Community Bank have closed or been absorbed into another institution.
And the city’s statistics mirror those nationwide. The number of Black banks has been steadily dwindling since the 1960s. As of March 2011, the FDIC counted 28 Black-owned banks in the United States, down from 54 in 1994. And there are several others teetering on the brink of extinction.
Black banks grew out of the barren soil of segregation. Beginning in 1888 with the Capital Savings Bank in Washington, D.C., these institutions provided loans for homes, small businesses, expanding churches and more, services that majority banks refused to provide to African Americans.
“Black banks played a major role in helping to develop Black communities,” said Michael Grant, president of the National Bankers Association, which has represented the interests of Black banks for the past 86 years. “These banks were there for the community then and still, when everyone else turns them down, Black banks are still there as the last resort—though we wish we were there first.”
With integration, and the implementation of laws such as the 1977 Community Reinvestment Act, which requires depository institutions to lend in the less-advantaged portions of the communities in which they operate, Black banks faced stiff competition from major lending institutions. And later, as these banks consolidated into financial behemoths, the smaller community banks were inched out even more.
“After integration, one of the most toxic side effects is that we started to run and spend our money elsewhere,” Grant said. “We’re the only group in America that refuses to spend money in our community and we’re paying a high price for it.”
Access to major banks made Black-owned banks somewhat irrelevant, O’Connor argued.
“They don’t have the same significance. A lot of what made them unique has disappeared,” he said. “[And] unlike other racially-concentrated banks, their best customers have outgrown them.”
With desegregation, middle-income African Americans fled their inner-city communities for the suburbs. The defections meant that Black banks found themselves in mostly indigent communities with high levels of unemployment, lower education attainment, drug addiction and crime, including vandalism, which meant higher costs of insurance.
And Black churches, an important part of the banks’ clientele, also lost their best tithers, meaning they soon found themselves in arrears on their loans.
“The need and role of Black banks were not to serve people who were not bankable,” said Joseph Haskins Jr., co-founder, president and CEO of Harbor Bank of Maryland. “Part of the problem that developed with Black banks is that they were too narrowly focused in communities that had changed radically. And many Black banks who failed to change their profile of banking were disproportionately serving those who were less capable of meeting the requirements of paying loans and other responsible aspects of banking.”
African Americans comprise the largest rate of unbanked consumers, according to the FDIC. More than one-fifth of Blacks do not use any banking services, mostly due to lack of income. Another 33.9 percent are underbanked–meaning these households have a checking or savings account, but often rely on alternative financial services such as non-bank money orders, non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops.
The recent Great Recession, which was initiated by the implosion of the housing bubble in 2007, has created an even bleaker economic climate for Black banks, as the African-American community faced unduly high jobless rates and the onerous toll of subprime loans.
“Even though Black banks didn’t lead us into the Great Recession they were disproportionately hurt,” said Dedrick Asante-Muhammad, director of NAACP Economic Department. “Even if you made a good loan, if your customer lost their job, they can’t make their mortgage.”
As more and more customers—including churches, whose congregants had less capacity to give—defaulted on their loan payments and mortgages, the banks found their portfolios bogged down with toxic assets that could not be off-loaded.
And, some financial experts say, Black banks were less able to access relief programs such as the Community Development Capital Initiative program, which was geared toward financial institutions that serve underserved communities and financed under the Troubled Asset Relief Program.
Linus Wilson, assistant professor of finance at the University of Louisiana at Lafayette and coauthor of the study “Discrimination in TARP Investments,” said his research shows that non-African American institutions were as much as 10 times more likely to receive federal subsidies from the program than Black-owned institutions after controlling for the financial health of the banks.
“The TARP program is distasteful enough to most Americans. [But] the finding that racial discrimination may have played a role in the selection of banks for the program is even more disconcerting,” he told the AFRO.
Grant had a more optimistic outlook, saying despite the grave losses, Black banks survived the recession based on their conservative, risk-averse approach to banking and will continue to thrive because survival is part of their DNA.
“These banks are doing well considering they have a very low percent of capital,” he said. “If you look at these banks, you would find a lot of resilience and creativity. They are experts at managing with few resources and small margins.”
There is hope for the future of Black banks, the NAACP’s Asante-Muhammad added.
“More and more, big banks are not looking to serve middle-income consumers and are leaving that to smaller banks and credit unions, etc. [For them] if the customer does not have $100,000 or more, [they question] is it worth the risk? And that opens up a space for individual community banks,” he said.
O’Connor, the Chicago-based financial advisor, said Black banks have to find their lending niches and focus on services such as wealth management.
“It’s going to be nonbanking-related services that’s going to help them to survive,” he said, citing Chicago’s Seaway Bank & Trust Co., which provides currency exchange services at the airport.
Haskins agreed. Harbor Bank claims to be the first community bank in the country to have an investment subsidiary, Harbor Financial Services.
His bank survived the harrowing financial times because of its diversification in services and clientele and also on the use of the latest technology, which savvy bank customers of today have come to expect, the 65-year-old banking executive said. In effect, in order to have a future, Black banks have to change their identity—he believes the term “Black bank” is obsolete—to adapt to the reality of the times.
“The days when banks could focus exclusively on the Black community or limited urban community is history…. You have to look at banking much more holistically,” he said. “It comes back to the survival of the fittest: Those that survive are the ones that are most adaptable to the changing times.”
Reprinted fron the Afro American
2013 National Bankers Association Board Members
Michael Grant, President, National Bankers Association, Washington, DC
Kim Saunders, Board Member; President & CEO, Mechanics & Farmers Bank, Durham, NC
B. Doyle Mitchell, Chairman, NBA; President, Industrial Bank, Washington, DC
Robert P. Cooper, Immediate Past Chairman; Senior Counsel, One United Bank, Boston, MA
Cynthia Day, Secretary; President & CEO, Citizens Trust Bank, Atlanta, GA
Darius Davis, Regional Vice Chairman; Executive Vice President, The Harbor Bank of Maryland, Baltimore, MD
Sidney King, Regional Vice Chairman; Regional President, Kansas/Missouri, Liberty Bank, Kansas City, KS